HDFC Limited - Cruise control as always - Antique

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

Margins and spreads to remain stable; lending hikes to offset increase in funding costs

During 2QFY14, HDFC borrowed INR200bn from banks, increasing its proportion of bank funding in overall borrowing to 19% from 8%. This resulted in spreads compressing 10bps QoQ to 2.19%. With money market rates cooling-off significantly, given the sharp flow in FCNR (B) deposits, HDFC has been able to borrow from bond markets during 3QFY13. Hence the company has repaid high cost bank funding of NR100bn during the current quarter and replaced it with borrowings from money markets. The management clarified said the net increase in lending rates is at 40-50bps over the last six months. The company has increased its retail and wholesale rates by 25bps and 65bps, respectively. Hence the hike in lending rates is to offset the increase in borrowing costs resulting in margins and spreads remaining stable at current levels.

Management expects mortgage buoyancy to continue, asset quality to remain stable

Despite the adverse macro-economic environment, the management expects loan book to remain healthy at 16-18% levels for FY14e. Retail and corporate loan growth is likely to be at 20-22% and 12-14%, respectively. Sanctioned pipeline to corporate loan segment is reasonably strong. Management also highlighted that despite a lot of investor pessimism, current health of real estate companies is far better than what it was 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. HDFC has classified loans of INR4.6bn to one particular project of a real estate developer in Chennai as a non performing asset during 2Q. It has already initiated SARFESI notice and is in possession of the property. HDFC is hopeful of recovery over the next 6-9 months.

Subsidiaries extremely well capitalised to fund own growth.

Most of HDFC's subsidiaries have grown sizably and become self-sufficient in terms of funding their own growth. There is no requirement for further capital infusion in the life insurance business as it is now profit making. Further, HDFC Bank is unlikely to raise capital over the next 12-18 months.

Valuation and outlook

At the current market price of INR800 per share, HDFC is trading at 3.9x FY15e P/BV and 20x FY15e P/E, which continues to remain a tad expensive. Hence, we maintain our Hold recommendation on the stock with a target price of INR840 per share.

Source : Equity Bulls

Keywords