HDFC stock fully priced at current valuations; REDUCE says Kotak Sec,

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In-line quarter; strong outlook but priced in. HDFC reported PAT of Rs8.08 bn, up
22% yoy and 1% above estimates. Business traction was strong – 20% loan growth
and stable qoq margins buoyed by the recent PLR hike. The overall margins outlook is
turning out to be somewhat benign for NBFCs, as borrowing costs have not yet been
moving up – likely to start from next quarter. Despite strong growth outlook, we find
the stock fully priced at current valuations; REDUCE.


Core business growth underpins earnings
HDFC reported PAT of Rs8.08 bn, up 22% yoy and 1% above estimate. Operating income
(excluding capital gains) was up 37% yoy on the back of 20% loan growth including loan selldown
(19% on-balance sheet loan growth), yoy improvement in spreads and higher fee income.
Strong loan growth
The buoyancy in real estate sales has driven HDFC’s business – retail disbursements were up about
30% yoy in 2QFY11 as compared to 63% growth reported for 1QFY11.Overall disbursements
growth was 28% yoy in 2QFY11, somewhat above 25% reported in 1QFY11. The company has
not sold down any loans during this quarter.
We expect HDFC’s loan growth to remain moderate at about 22% over the next few quarters. We
believe that mortgage demand will likely remain strong on the back of a vibrant economy. Our real
estate analysts team expects revenue from real estate sales (for the industry) to rise by about 35-
40% yoy in FY2011E; this will in turn drive disbursement growth for mortgage finance companies.
On the large base, new retail property bookings will likely rise by about 20% (will drive retail loan
approvals). Prices have risen by 15-25% across most major markets. Despite rising income levels,
sharp rise in prices coupled with higher interest rates will likely affect affordability over the
medium term.
Reported spreads stable qoq; calculated margins higher than expected
HDFC’s reported spreads were stable at 2.34% qoq. However, our calculated margins/spreads
improved in 2Q, as borrowing costs declined qoq for HDFC. The management highlighted that a
higher liquidity at the beginning of the quarter; higher fees charged by the banks (not reflected as
interest expense) on loans taken by HDFC; and repayment of high cost borrowings taken during
2008-2009 are resulting in lower borrowing costs. HDFC raised its PLR from September and the
complete impact will be visible from 3QFY11E; we believe that higher PLR should provide cushion
against rising borrowing costs.