Anand Rathi:: HDFC 3QFY11 – Robust lending business; maintain Buy

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HDFC
3QFY11 – Robust lending business; maintain Buy
 Profits up 32.7% yoy. 3QFY11 profits were driven by a rise in
net interest income (NII) and in treasury gains, despite higher
provisionings. We like HDFC as we expect its RoE to cross 20%,
supported by business growth opportunities, improving credit
growth cycle and subsidiaries’ robust operating performance.

 Robust disbursements and loan growth. Loan disbursements
grew 25% yoy, with loan growth coming in at 20.6% yoy (27%
adjusted for sell-down in loans to HDFC Bank). Loans to
individuals comprised 64.3% of loans and grew 21.9% yoy, faster
than corporate housing loans (19.2% yoy). The healthy growth in
approvals (29% yoy) augurs well for the outlook on housing-loan
growth. We expect a 19.8% CAGR in loans over FY10-13.
 Subdued other income. Fees grew 5.3% yoy, with less dividend
income (34% yoy decline) contributing to the modest non-interest
income. Further, the NBFC booked treasury gains of `1,672m this
quarter compared with `514m yoy; adjusting for this, net profit
growth was still healthy (~22% yoy).
 Higher provisions. HDFC made additional provisions on dual
rate home loans as per NHB’s recent directive; for this, `2,720m
was adjusted from its reserves. We expect the conservative growth
and its high provision buffer to keep credit costs low in FY10-13.
 Valuation. Our sum-of-parts valuation target is `834.60. We
value the mortgage business at `515.20 (3.8x FY12eBV) and
subsidiaries at `319.40.