HDFC - Sturdy credit growth, stable asset quality; Buy - Anand Rathi

Robust retail loan growth, stable spreads. HDFC's advances grew 19.4% yoy (24% on adjusting for "sell-down" in loans), with retail loans growing 24.1% yoy (31% on adjusting for "sell-down" in loans). Robust loan growth, coupled with stable 2.3% spreads, led to net interest income (NII) growth of 17.5% yoy. We estimate HDFC's loans to record a 19.4% CAGR over FY13-16, led by healthy demand from retail customers.

Fees decline, higher income from dividends, stable productivity. Fees declined 11.9% yoy (38.1% qoq); its share in non-interest income fell from 23% in 1QFY13 to 16.1% in 1QFY14. Income from dividends grew 36.1% yoy (167% qoq) and comprised 13.5% of profits before tax, compared to 11.6% in 1QFY13. Productivity was stable, with cost-income up 44bps yoy to 9.1%, one of the lowest among peers.

Stable asset quality, well-capitalized for growth. Asset quality is the best in class, with gross NPA at 0.77% of loans, down from 0.79% in 1QFY13. While non-performing loans for individuals fell 6bps yoy to 0.61% of loans, they increased 8bps for non-individual loans to 1.08%. We expect HDFC's prudent growth and high NPA provision buffer to keep credit costs low over FY13-16. With capital adequacy of 16.3% (tier-1 of 14%), it is adequately capitalized for growth opportunities in housing finance.

Our take. Robust loan growth, sturdy spreads and stable asset quality have driven profits. We have a Buy rating as we expect the RoE over FY14-15 to hold above 20%, supported by healthy business growth, stable spreads and the robust performance of subsidiaries. Our sum-of-parts-valuation price target is Rs. 873. We value the mortgage business at Rs. 594 (3.3x FY14e BV) and the subsidiaries at Rs. 279. Risk: Significant slowdown in the mortgage market, leading to slower-than estimated loan growth.

Source : Equity Bulls

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