HDFC Limited - Business as Usual - ANTIQUE

We met with the management of HDFC Limited and below are the key highlights:

Easing wholesale rates should lead to uptick in incrementally spreads

With CP & CD rates having declined by about 50-100bps since March 2013, we believe that HDFC limited is likely to be key beneficiaries of an easing wholesale rate in the system. The company has raised 3 year money at 8.48% (vs. 9.35% in March 2013).Hence Re-pricing of high-cost term deposits coupled with benign wholesale deposit rates will lead to lower cost of funds and expanding margins. Incremental funding for HDFC limited is coming from money market issuances i.e. Bonds, debentures, FRN and CPs which are 50bps cheaper than March 2013. In fact the bank funding has come down by INR 40-50bn since march and is replaced with bonds. Loan yields are holding up because of base rates regimes at banks and hence incrementally spreads for the company are likely to be higher than portfolio spreads during 1Q. Management expects spreads to remain flat within its historical band of 2.15-2.35%.

Mortgage buoyancy continues, asset quality stable

Retail growth momentum for the company remained intact at 25%YoY in FY13, thereby contributing around 80% of incremental loan growth. Despite adverse macro environment, management expects loan book to remain healthy at 18-20% levels for FY14e. Management highlighted that despite a lot of investor pessimism, current health of real estate companies is far better than during the credit crisis given that these companies have relatively lower leverage. Further, they are not facing any asset quality issues related to their retail loan portfolio. In fact, GNPA ratios continued to improve YoY for a 33rd consecutive quarter in a row during 4Q FY13.

Lower provisioning and risk weight on developer loans to residential projects

Reserve Bank of India has recently lowered provisioning (from 1% to 0.75%) and risk weights on bank loans (from 100% to 75%) to commercial real estate segment specifically for residential housing projects. NHB which regulates housing finance companies is likely to follow suit and issue similar guidelines for HFC's. Hence based on our calculations, this move will lead to provisioning release of 120bps of FY14E earnings and capital release of 180bps of FY13E Tier 1.

Valuation and outlook

At the CMP of INR 837, HDFC is trading at 4x FY15E P/BV and 19.9x FY15E P/E which continues to remain a tad expensive given the near term challenges. Hence, we maintain a HOLD recommendation on the stock with a TP of INR840/share.

Source : Equity Bulls

Keywords