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Housing Development Finance Corp. Ltd.
3Q earnings in-line; Maintain Buy and PO
„3QFY11 Earnings: In-line; retail volumes strong
HDFC’s 3QFY11 earnings at Rs8.9bn, up 33%, were exactly in line with
estimates. Loans grew by 21% yoy, adjusted for sell-down to HDFC Bank, growth
at 27% yoy. Disbursements grew 23% yoy, but were down +20% qoq owing to
sharp slowdown in corporate lending, but retail disb., in our view, are still up +4-
5% qoq. Topline (in-line) grew 20% yoy and spreads were maintained at +2.3%.
HDFC has recently effected a 75bps hike in lending rates and hence indicated
that they will be able to manage their spreads going ahead despite rising costs.
Asset quality comfortable with gross at 0.9% (down 9bps yoy). Tier 1 at 13%.
Tweak net profit est. by <1/2% to factor in lower fees
We have tweaked our net profit est. by <1/2% for FY11/12 to factor in lower fees
on corporate loan fees, which HDFC used to charge upfront earlier and has
stopped. We believe growth (retail vol.) is likely to sustain; this coupled with recent
rate hikes (75bps) should allay any fears of spread pressure ahead. Hence,
estimate HDFC’s net profit growth at +22/21% over FY11/12.
Maintain Buy and PO at Rs800
We maintain Buy and our PO at Rs800. We believe HDFC being a quality
“defensive growth” stock, valuations for the stock to be more “PE” led than BV led.
Hence, the stock trading at +21-22x FY11 earnings (adj. for subs) can continue to
trade at similar multiples one-year out given profit growth of +22/21% over
FY11/12. Moreover, although we maintain our subs value at Rs166/shr, we think
there may be some cushion to our SOTP, especially from life ins., which is
growing at a faster pace vs. our conservative est. on growth and margins.
3QFY11 result takeaways
HDFC’s 3QFY11 earnings at Rs8.9bn, up 33%, were in line with estimates, with
volume growth surprising positively, especially retail. Loans grew by 21% yoy,
adjusted for sell-down to HDFC bank, loan growth was 27% yoy. Individual loan
growth 31% yoy adj. for sell-down to Bank. Disbursement grew 23% yoy, but was
down +20% qoq owing to sharp slowdown in corporate lending, but retail
disbursements are up +4-5%, in our estimates. Retail disbursements are up 39%
for nine months ending Dec’10. Sanction growth also strong at 28% yoy in 3Q.
Topline also was exactly in line with estimates with a growth (NII) of 20% yoy, but
surprise was a sharp rise in int. costs (up 16% qoq), although, spreads were
maintained at +2.3%. HDFC has recently effected a 75bps hike in lending rates
and hence indicated that they will be able to manage their spreads going ahead
despite rising costs.
Fees disappointed yoy (up 5%), but partly due to stopping of corporate loan fees
upfront. Further, the results also factor in one-off income of +Rs1.6bn on account
of profit booking in IL&FS. Opex continues to be under check with cost-income
ratio at 7.3% down from 8.6% in 2QFY11 and 8.0% in 3QFY10. In absolute
terms, opex has increased by only <14% yoy vs. 25% yoy In 2Q last year.
Incremental borrowings came from bank loans, although total borrowings
contracted qoq as HDFC b/s contracted. Asset quality remains comfortable with
gross NPLs coming down by 9bps yoy to 85bps. HDFC made additional
provisions on dual rate home loans as per NHB’s recent directive; for this,
Rs2.7bn was adjusted from its reserves. HDFC’s tier I capital continues to be
healthy at 13.0%.
Tweak profit (net) by 1/2% for FY11/12
We have tweaked our net profit estimates by <1/2% for FY11/12 to factor in lower
fees as lower corporate lending fees, which HDFC used to charge upfront earlier
has stopped. Earnings growth lower at +18-20% owing to adjustment to warrant
conversions.
We estimate HDFC’s net profit is likely to grow at +22/21% over FY11/12
supported by disbursal growth at +20% leading to volume growth of +22/20% in
FY11/12 and spreads maintained yoy. More importantly, we believe the RoE is
also likely to sustain at +19-20% through FY11-12 after factoring in warrant
conversion. Core RoEs still at +28-30% through FY13.
Maintain subs. value at Rs166/shr.
We maintain our subs value at Rs166, which includes life insurance value at
Rs41/shr., HDFC Bk at Rs182/shr. and the balance is AMC biz. at Rs24/shr., pre
10% hold’co discount.
Maintain PO at Rs800; may trade on PE vs. PB
We maintain Buy and our PO at Rs800. We believe HDFC being a quality
“defensive growth” stock, valuations for the stock to be more “PE” led than BV
led. Hence, the stock trading at +21-22x FY11 earnings (adj. for subs) can
continue to trade at similar multiples one-year out given earnings growth of
+22/21% over FY11/12 and core RoEs (mortgage business only) of +28-30%
through FY13. Also, although we maintain our subs value at Rs166/shr, we think
there may be some cushion to our SOTP, especially from life ins., which is
growing at a faster pace vs. our conservative est. on growth and margins.
Price objective basis & risk
HDFC (HGDFF)
We set our PO at Rs800 to factor in 1) overall growth momentum sustaining,
especially retail and 2) we believe HDFC is likely to deliver RoEs of 20% (core
RoEs of 30%) on profit growth of 22/21%. Stock is down, over the last 1/3
months, by 7/14%, resp. and we believe as we begin to see more visibility of
volume growth (as in this quarter) the stock can may continue to trade at +4.0x
FY12 book. Our PO is based on a premium to the Gordon model theory. Further,
we think may be upside to our SOTP (Rs166/shr), especially from HDFC Bk
(distribution) and life insurance (growth YTD stronger than estimated for FY11). A
sharp rise in NPLs and an inability to maintain growth are risks to our price
objective.
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