HDFC Limited - Contained credit cost with strong core buoys earnings - ICICI Securities

HDFC Ltd's Q3FY21 earnings were characterised by 1) strong core - NII growth settling upwards of 25% with NIMs further expanding 30bps to 3.7%; 2) meaningful uptick in individual loan disbursements (26% YoY) suggesting market share gain; 3) collection efficiency nearing pre-Covid level for retail loans (97.6% from 96.3% in Sep), though lags for non-individual segment (sub-80%); and 4) rise in stage-2 pool to 7.1% that will keep bucket-wise movement volatile - though has conservatively included restructuring and ECLGS pool. Earnings quality reflects its improving market positioning with capital buffer, funding cost benefit and ability to contain stress even during challenging times (stage-2/3 pool capped sub-10%). AUM growth momentum nears double digit and overall provisioning buffer of 2.7% (of advances) improves visibility on growth and credit cost outlook. Maintain BUY with a revised SoTP-based target price of Rs3,231 (assigning 3.25x to core FY23 book; earlier Rs2,423).

- Collection efficiency - nearing pre-Covid level for individual loans; lagging for non-individual segment: Collection efficiency for individual loans pre-Covid was 97.8% and in December it improved to 97.6% - up 130 bps since September from 96.3% (collection efficiency is against billing and doesn't include overdues). Overall AUM collection efficiency at 91-92% suggests collection efficiency for non-individual segment is sub-80%. This still lags pre-Covid trends when overall collection efficiency used to be 95-96% and collections in non-individual segment at 80%.

- Stage-3 contained at better-than-expected levels; stage-2 up as it includes restructuring and ECLGS pool: Stage-3 assets went up mere 10bps sequentially to 2.28%. Pro forma GNPLs trend suggest rise was from non-individual segment - pro forma GNPLs were reported at 1.91% (up only marginally from 1.83%); with individual NPLs at 0.98% (0.88% QoQ) and non-individual NPLs at 4.35% (4.19% QoQ). Stage-2 assets though up from 4.9% in Q2FY21 to 7.1% in Q3FY21 include 0.9% restructuring as well ECLGS eligible pool of 0.5%. Coverage on stage-2 is down from 25% to 18% as incrementally pool getting added is attracting lower provisioning and it has been conservative in classifying them in stage-2 category.

- Restructuring of 0.9% included in stage-2: Entire invoked restructuring pool of 0.9% of AUM (Rs50.5bn) is included in stage-2 assets (of 7.1%). Restructuring includes 26% individual loans and 74% non-individual loans. This suggests that within individual loans, restructuring proportion is 40bps and non-individual book is 3%. Of the overall restructuring, Rs26bn (0.5% of AUM) pertains to one single group (Shapoorji Pallonji). Balance restructuring in non-individual is spread across 15-20 accounts.

- ECLGS request of Rs23bn included in stage-2: The company has received eligible request under ECLGS scheme of Rs23bn - though less than Rs1bn has been disbursed yet, it has clubbed all accounts in stage-2 pool.

- Adequate provisioning buffer to cushion earnings volatility: HDFC has been utilising 30% of any windfall gains in building a contingency buffer. This quarter, too, after utilising some buffer it created provisioning of Rs5.9bn (<50bps annualised credit cost). Outstanding provisions still remain flat QoQ at Rs123bn - 2.6% of gross assets - as write-offs were similar at Rs6.4bn. With this buffer, incremental provisioning requirement will be capped at 0.6%/0.7%/0.5% over FY21E/FY22E/FY23E, respectively.

- Individual portfolio in a growth phase, wholesale book yet to pick up momentum: Individual disbursements have entered into a growth phase - up 26% YoY in Q3FY21, thereby, leading to cumulative disbursements in 9MFY21 at 86% of 9MFY20 level (despite muted growth in H1FY21). This is supporting 4% QoQ rise in individual loans and some traction in overall AUM to 10%. December 2020 witnessed the highest ever levels in terms of receipts, approvals and disbursements. Nearly 91% individual disbursements entailed property deals entered over the past four months, re-affirming that housing demand is not pent-up demand. Also, in terms of customer profile, 34% home loans approved in volume terms and 17% in value terms were to customers from EWS/LIG category. However, higher repayment/prepayments (from Raheja, Embassy and several other developer groups) led to run-down of 3% QoQ in non-individual book. We are building-in loan growth of 14-16% over FY22/FY23.

- NIMs expanded more than 30bps, boost NII growth upwards of 25%: Interest expenses are down sharply by 12% YoY/8% QoQ thereby, supporting more than 30bps expansion in NIMs. Following levers played in its favour: 1) Prevailing low short term interest rates; 2) unwinding of liquidity to Rs168bn from Rs225bn/Rs320bn in Q2FY21/Q1FY21; 3) bank borrowings are getting repriced to market-linked rates leading to benefit on cost over MCLR reduction. While NIMs expanded 30bps in Q3FY21 (over and above 20bps in Q2FY21), sustenance will be key as there will be upward pressure in borrowing rates and lending rates too will get repriced down with a lag. We expect NIMs of 3.2%/3.2%/3.1% in FY21/FY22/FY23, respectively.

- HDFC reported Q3FY21 PAT of Rs29.3bn - almost flat QoQ and ahead of expectations due to much lower provisioning at Rs5.9bn (sub-50 bps credit cost). Optically, earnings were lower YoY as reported earnings in Q3FY20 (last year) included Rs90bn of fair gain on Gruh investment. Also, Q3FY21 earnings included:

- Income on loans assigned to the tune of Rs71bn is Rs4.1bn.
- Net gain on fair value changes includes MTM on investments in RBL Bank.
- Charge for employee stock options at Rs1.5bn per quarter is expected to continue for 3-4 more quarters.
- Profit on sale of part stake in HDFC Life and dividend of Rs1.6bn (Rs40mn in Q3FY20).
- RWA is again up 2% QoQ after a decline in last quarter - this besides growth in AUM is also due to absolute increase of Rs100bn in investments in a quarter.

Shares of HOUSING DEVELOPMENT FINANCE CORP.LTD. was last trading in BSE at Rs.2657.65 as compared to the previous close of Rs. 2582.55. The total number of shares traded during the day was 320733 in over 24624 trades.

The stock hit an intraday high of Rs. 2761.95 and intraday low of 2610.25. The net turnover during the day was Rs. 867209987.

Source : Equity Bulls

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