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HDFC LTD - Q3FY14 Result Update - "ACCUMULATE"




Kisan Ratilal Choksey Shares and Securities Private Limited


27 Jan 2014





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HDFC LTD - Q3FY14 Result Update CMP: Rs 842 Target Price: Rs 926 Recommendation: ACCUMULATE “Premium for consistent performance” HDFC delivered another in line solid operating performance with PAT of Rs1278 crore growing by 12.1% y-o-y. Core PAT (excluding capital gains) grew strongly 17.2% y-o-y driven by healthy NII growth and lower provisions. NII went up 14.5% y-o-y aided by healthy loan book (including loan sold) growth 21% y-o-y. Reported lending spreads have been stable Q-o-Q to 2.25% (2.24% in Q2FY14) reflecting superior ability to manage pricing with growth intact. Loan book net of loan sold grew 18.9% y-o-y by strong growth in retail loan book (24% Y-o-Y). Net NPA fell marginally from 0.79% in Q2FY14 to 0.77% in Q3FY14. The company has total provisioning including specific provision at 0.95% of Loan book, significant higher than regulatory requirement. Unrealized gains increased piercingly 15.3% Q-o-Q to Rs214 per share. Healthy loan book growth coupled with stable spreads led to impressive NII growth: NII increased impressively 14.5% Y-o-Y driven by healthy loan book growth (21 y-o-y) and stable spreads. Reported spreads have been stable at 2.25% during the quarter. However, calculated spreads have increased 51bps Q-o-Q due to 31bps fall in cost of borrowings. Loan book incl. sell- downs grew by 21% y-o-y led by strong growth in retail loans 27% Y-o-Y. Retail and developers business spread stood at 197bps (down 1bps q/q) and 282bps (up 6bps q/q) respectively. We believe HDFC continues to maintain spread in the range of 2.2% -2.3%, going forward. We model in 19.6 CAGR in NII driven by loan book 19.1% CAGR over FY13-FY15. Higher dividend income and healthy fee income supported non interest income: Loan processing fees grew 52% y-o-y to Rs65crore during the quarter. Trading gains were 35cr vs. 87cr in Q2FY14, lowered non interest income. Dividend income went up 69% y-o-y to Rs76 crore. Unrealized gains increased 15.3% q-o-q to Rs 33379 crore. Strong retail loan book growth driving loan book growth: Loan book including sell downs grew by 21% y-o-y driven by individual loan book (24% y-o-y) and wholesale loans (5.4% y-o-y). HDFC has sold Rs3563 crore in the last 12 months; off balance sheet book stood at Rs16211 crore (up 1.0% y-o-y). Retail and wholesale loan book mix (after adjusting loan sold) stood at 67% & 33% respectively. Asset quality marginally improved: Gross NPAs improved 2bps Q-o-Q to 0.77% during the quarter. Improvement in asset quality coupled with benefit of lower provision on residential project loans according to NHB guidelines, resulting 38% Y-o-Y decline in provision. The company has excess provisions to the tune of Rs466crore, providing enough cushion for incremental provision on account of change in regulation. Valuation & Outlook HDFC reported steady operating performance during the quarter. Business growth continued to be 20% plus while asset quality and spreads remain largely stable. Leadership in housing finance sector, superior underwriting standards, stable spreads, well diversified borrowing profile and unlocking value of subsidiaries (post 49% FDI in insurance) are key value drivers for the stock in medium term. We expect HDFC to deliver 18.1% CAGR in core earnings on the back of strong loan growth, stable spreads and steady credit cost over FY13-FY15. At Rs 842, the stock is trading at 3.5x FY15 book value and 18.3x FY15 earnings. RoA and RoE continue to remain at superior levels ~ 2.7% ...

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