HDFC Bank: 2QFY11 – Return of the consumption cycle?

Visit http://indiaer.blogspot.com/ for complete details 􀂄 􀂄


HDFC Bank
OW: 2QFY11 – Return of the consumption cycle?
 HDBK’s earnings hardly ever surprise, but interestingly, the
drivers appear to be changing in this upcycle
 Retail loan growth is on an upswing and along with robust
wholesale growth, credit costs are decelerating
 Retain OW, raise target price to INR2,850 from INR2,460
implying a total potential return of 21%


2QFY11 earnings came a tad below our higher-than-Street expectations,
underperforming a bit on fee income. The stock underperformed the market today ending
down 1.5% but is up 40% YTD outperforming the Sensex 24%. The main stock catalyst is
rising short rates.
Key themes: Loan growth was supported by both retail and wholesale, both growing 33%
y/y. Interestingly, this is the fourth quarter in a row that retail loans have accelerated from
a low of 7% y/y growth, reflecting a likely return of consumption growth. Also, excluding
the floating provision of INR1.5bn, loan loss provision charges appear to be on a decline –
typical in a credit upcycle.
Operational review: 32% core loan growth (ex-one-offs), rock-steady margins with
CASA at 50%, slightly weak fee growth and stable asset quality were key features.
Interestingly, both secured and unsecured retail loans have accelerated although the
proportion of the latter remains small.
Earnings outlook: We expect loan growth to remain robust at 30% in FY2011E, 2012E
from both corporate and the retail books, supported by lower drag from the rundown of
the erstwhile Centurion Bank loan book as it diminishes over the next four to six quarters.
With firm margins and improving asset quality, we expect earnings to grow 33% this year
and then 25% CAGR over FY12E and FY13E (for which we introduce estimates).
Valuations and target price: We continue to value HDFC Bank using a weighted
average combination of PE, PB, and economic profit model (EPM) methodologies.
However, we now use 24m forward EPS and BVPS to set our 12m forward target price.
Accordingly, we apply a 10% discount to our erstwhile target multiples given lower
visibility of the same, with the PE multiple now at 24x from 27x and PB at 3.6x from
4.0x. Accordingly, we arrive at a 12-month target price of INR2,850, implying a potential
return (including dividends) of 21%. We retain our Overweight rating on the stock.
Key risks include: Slower than expected loan growth and worsening asset quality.