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EARNINGS REVIEW
Housing Development Finance Corporation
Sell Equity Research
In line with expectations on core, PAT ahead on capital gains
Q3FY11 key highlights
HDFC Ltd. (HDFC) reported 3QFY11 net profit of R8.91bn (up c.33% yoy), 7%
ahead of GSe buoyed by one-off capital gains of Rs1.7bn. PBT before capital
gains was 4% lower than GSe. Key highlights: (1) Based on our calculations,
yield on loans rose by c.50bp qoq, reflecting the PLR hike/withdrawal of teaser
scheme. However, average cost of funds rose at an accelerated pace (up 77bp
qoq to 7.4%), reflecting the spike in interest rates. Consequently, our
calculated lending spreads declined to 3.2% by 28bp qoq and c.10bp yoy,
resulting in NII growth of 18% yoy. Reported spreads remained flat qoq at
2.33%. On excluding Rs1.3bn of interest costs on zero coupon bonds routed
through the securities premium reserve, calculated core spreads are c.50bp
lower and NII growth at c.15% yoy in Q3. (2) Disbursements grew at 25% yoy
(2% below GSe), with retail disbursements up 38% yoy (on a low base). Loans
grew c.21% yoy, post the sell-down of loans to HDFC Bank (of Rs21.5bn, which
is c.70% of HDFC Bank’s disbursements in Q3). (3) HDFC made Rs2.7bn of
provisioning on NHB’s requirement of 0.4% of standard provisions on nonindividual loans and 2% on teaser loans, through the reserves.
Maintain Sell on lack of near-term catalysts
HDFC is currently trading at stand-alone 3.74x FY12E P/BV and 16.4x FY12E
P/E; at premium multiples given sustainable high RoEs and growth potential.
However, given the lack of near-term catalysts, rising rates, and a competitive
landscape, we reiterate our Sell rating. We fine-tune our FY11E/12E/13E EPS
estimates by +1.6%/+0.4%/+1%, primarily adjusting for lower expenses. Our
new 12-m SOTP-based price target is Rs650 (from Rs645). Key risks:
Downside: Competitive pressures affecting growth and profitability in retail
loans; Upside: Higher margins, lower cost of operations
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