India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC
Growth intact; margins sustained
�� Earnings momentum sustained
HDFC reported 33% Y-o-Y growth in Q3FY11 PAT to INR 8.9 bn (in line with our
expectation) including investment profit of INR 1.7 bn on sale of partial stake in
IL&FS. Core net interest income grew 20% Y-o-Y driven by 21% Y-o-Y growth in
loan book (24% adjusting for sell downs to HDFC Bank) and spreads remaining
stable at ~2.3%. However, net operating income growth was restricted to 15% Yo-
Y (to INR 11.6 bn) due to relatively lower dividend and lease income.
�� Loan book grew 21%; INR 21.5 bn sell downs in Q3FY11
The company’s loan book grew (post sell downs) 21% led by similar growth in the
individual loan segment. During the quarter it sold INR 21.5 bn of individual loans
to HDFC Bank. We estimate overall disbursements to have grown more than 20%
Y-o-Y in Q3FY11 led by 30% growth in the individual loan segment. With funding
cost pressures building up, HDFC has discontinued special scheme loans from
December. The outlook on mortgage growth is maintained and we expect loan
book to post 23% CAGR over FY10-12E.
�� Spreads to sustain; well matched asset-liability profile
Spreads (reported) during the quarter were sustained at ~2.3% Q-o-Q.
However, NIMs on calculated basis are estimated to have declined ~15bps Q-o-Q
primarily because of rise in funding cost (calc). The 75bps increase in PLR in
December will help offset funding cost pressures in the coming quarters as the
company follows a three month reset cycle and we expect margins to be
maintained at 3.4% over FY11-12E. NPLs (90dpd) were maintained at 0.85% in
Q3FY11. The company has partly met standard asset provisioning requirement
on special loan schemes by utilising INR 2.7 bn from additional reserves and
partly by utilising excess provisioning of INR 1.1 bn.
�� Outlook and valuations: Valuations fair; maintain ‘HOLD’
Core earnings were strong in 9mFY11 with disbursement growth driven by
individual loans and spreads sustaining at 2.3%. We expect the company to
grow disbursements 22% and maintain interest margins at ~3.4% over FY10-
12E. We maintain our EPS estimate at INR 22.9 for FY11 and at INR 28.2 for
FY12. The stock is currently trading at 4.2x FY12E book and 22.8x FY12E
earnings. Our SOTP fair value for FY12E stands at INR 685. We maintain ‘HOLD’
recommendation and rate it ‘Sector Performer’.
Earnings momentum sustained
HDFC reported 33% Y-o-Y growth in Q3FY11 PAT to INR 8.9 bn (in line with our
expectation) including investment profit of INR 1.7 bn on sale of partial stake in IL&FS.
Core net interest income grew 20% Y-o-Y driven by 21% Y-o-Y growth in loan book
(24% adjusting for sell downs to HDFC Bank) and spreads remaining stable at ~2.3%.
However, net operating income growth was restricted to 15% Y-o-Y (to INR 11.6 bn),
due to relatively lower dividend and lease income.
• Disbursements in the individual loan segment grew 30% in Q3FY11 (compared to
42% in H1FY11). It sold down INR 21.5 bn of loans to HDFC Bank during the quarter.
• Dividend income was relatively lower at INR 269 mn (compared to INR 1.4 bn in
H1FY11 and INR 409 mn in Q3FY10) as HDFC Bank’s dividend was majorly accrued
in Q1FY11 itself and only a small portion was booked in both Q2FY11 and Q3FY11.
• Fee income was in line with expectation at INR 503 mn, marginally down Q-o-Q due
to soft disbursements.
Loan book grew 21%; INR 21.5 bn sell downs in Q3FY11
HDFC grew its loan book (post sell downs) 21% led by similar growth in the individual
loan segment. During the quarter it sold INR 21.5 bn of individual loans to HDFC Bank.
We estimate overall disbursements to have grown by more than 20% Y-o-Y in Q3FY11
led by 30% growth in the individual loan segment. The softness seems to be in the
corporate developer segment.
The company continued with its special home loan schemes during the quarter after
introducing variants of ‘Dual Rate Home Loan’ products in July and September. Despite
competition from PSU banks, it has been able to sustain growth momentum in individual
disbursements. Currently, ~27% of its individual loan book is under the dual rate
scheme and balance is floating. However, special schemes have been discontinued from
January.
The outlook on mortgage growth is maintained and we expect loan book to post 23%
CAGR over FY10-12E.
Spreads to sustain; well matched asset-liability profile
Spreads (reported) during the quarter were sustained at ~2.3% Q-o-Q. However, NIMs
on calculated basis are estimated to have declined ~15bps Q-o-Q primarily because of
increase in funding cost (calc). Rise in wholesale as well as retail deposit rates resulted in
pressure on funding cost; however, the company skewed its borrowing more towards
bank loans during the quarter to have minimal impact of wholesale cost on spreads.
Yield on advances is estimated to have improved 50bps on two counts:
• Full impact of increase in special home loan scheme rates by introducing dual rate -
4 products in September (wherein rate was fixed at 8.5% up to March 2011, 9.5%
for April 2011-March 2012, and floating rate thereafter).
• Discontinuing dual rate – 4 in December and increasing its RPLR by 75bps.
The company’s net interest income (including surplus from investments in MFs) grew
20% Y-o-Y (flat Q-o-Q) to INR 10.7 bn.
The 75bps increase in PLR in December will help offset funding cost pressures in the
coming quarters as the company follows a three month reset cycle and we expect it to
maintain margins at 3.4% over FY11-12E.
Asset quality maintained
NPLs (90dpd) have been maintained at 0.85% in Q3FY11 (0.86% in Q2FY11). HDFC was
required to create a provisioning of INR 4.3 bn to meet recently introduced standard
asset provisioning norms (by National Housing Board) on special loan schemes. This was
partly met by utilising INR 2.7 bn from additional reserves under Section 29 C of the
NHB Act, INR 450 mn of provisioning charged to P&L in 9mFY11, and partly by utilising
excess provisioning of INR 1.1 bn.
The revised provisioning norms are as follows:
• 0.40% on standard assets under housing loans to non individuals.
• 2% of standard assets in respect of housing loans under dual rate home loan
scheme.
As it has discontinued with special loan schemes, no more standard asset provisioning at
2% will be required. We expect the company to maintain superior asset quality, going
forward, as well.
Company Description
HDFC is India’s largest provider of housing finance, primarily focusing on retail housing.
The company has widened its distribution network to 283 offices in India. It also covers
over 90 locations through its outreach programme, which has helped the corporation
disburse housing loans in more than 2,400 towns and cities in India. It has also
supplemented the distribution channel through the appointment of direct selling agents
(DSA). As on December 31, 2010, 59% of the shares are held by foreign institutional
investors/foreign direct investments and 12% by individuals.
Besides the core business of mortgages, HDFC has evolved into a financial conglomerate,
diversifying into other businesses through its subsidiaries viz., HDFC Standard Life
Insurance (73%), HDFC Asset Management Company (60%), HDFC Bank (19.4%), and
HDFC General Insurance Company (74%).
Investment Theme
HDFC is the strongest and the most venerable play on Indian mortgages over the long
term. We expect the company, with its strong brand recall, superior real estate
knowledge, and revamped distribution strategy, to attain 23% CAGR in loan
disbursement over FY10-12E.
Besides the core business, HDFC’s insurance, AMC, banking, BPO, and real estate private
equity businesses are also growing at a rapid pace and the estimated value of its
investments/subsidiaries explains HDFC’s ~35% market capitalisation. Value of stakes in
HDFC Bank and HDFC Standard Life form a significant portion of its unrealised gains. The
outlook on mortgage growth and asset quality has improved since January with change
in the macro environment. The stock has always traded at a premium to other financial
stocks due to its stable earnings profile, superior asset quality and strong management.
Key Risks
Increase in competition and sustained slack in the mortgage market can lead to lower
growth than our estimates.
Higher-than-expected increase in funding cost and inability to pass the cost to customers
in the current tightening monetary environment will adversely affect margins and
profitability.
Risk of fraud and NPA accretion due to increase in interest rates and fall in property
prices is inherent to the mortgage business.
No comments:
Post a Comment