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HDFC Ltd
Key highlights of 3QFY11 and what can be expected for the rest of FY11
New regulatory norms
The new LTV and standard asset-provisioning norms issued by the National Housing
Bank have capped the LTV ratio at 90% for a ticket size below INR2m and at 80% for
above INR2m. Also, a 2% standard provisioning rate has been prescribed for variable
rate loans (teaser loans) given to individuals. These norms are in tune with the RBI’s
recently issued mortgage norms and indicate a general regulatory stance towards
cooling speculative pressures in the property market. We believe HDFC’s earnings will
not face pressure from the new norms as it has an ample provision buffer.
Our expectations for FY11 and FY12
We assume loan growth of 21% (compared to 22-25% by Bloomberg consensus) for
FY11 and 22% for FY12, and core net interest spread of 2.7% and 2.5%, respectively.
Exhibit 37 shows the loan approval and disbursements trend for HDFC. We also expect
the company’s provision buffer of INR3.8b (excess provisions over the NHB’s norms) to
more than offset the incremental standard asset-provisioning need of INR3.2b. We had
downgraded HDFC ahead of the 3QFY11 results (see our report, “Richly valued”, dated
5 January 2011) on valuations. We see no significant re-rating catalysts in the near
term and term-funded institutions typically underperform in a tight liquidity environment.
We maintain our HOLD rating.
Key upside risks to our thesis and TP are portfolio flight to quality from other housingfinance
companies and a sooner-than-planned listing of the life-insurance subsidiary,
HDFC Standard Life. Downside risks are lower-than-expected loan growth and higherthan-
expected credit costs.
Key risks to our downgrade
Our rating downgrade is primarily because we find valuations expensive, we see no
significant re-rating catalysts in the near term and term-funded institutions typically
underperform in a tight liquidity environment. Key upside risks to our thesis and TP are
portfolio flight to quality from other housing-finance companies and a sooner-thanplanned
listing of the life-insurance subsidiary, HDFC Standard Life. Downside risks are
lower-than-expected loan growth and higher-than-expected credit costs.
Valuation
Our TP of INR660 consists of INR450 for the core mortgage book and INR210 for the
subsidiaries. Our TP is based on a three-stage residual income model, which assumes
8% risk-free rate, 6% equity-risk premium, beta of 1.0, 4% terminal growth rate and
10% terminal CoE. The core mortgage book trades at 3.1x adjusted P/BV and 17x P/E
on our FY12 estimates. At our TP, the core mortgage book is valued at 3.3x ABV and
18.5x P/E on our FY12 estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC Ltd
Key highlights of 3QFY11 and what can be expected for the rest of FY11
New regulatory norms
The new LTV and standard asset-provisioning norms issued by the National Housing
Bank have capped the LTV ratio at 90% for a ticket size below INR2m and at 80% for
above INR2m. Also, a 2% standard provisioning rate has been prescribed for variable
rate loans (teaser loans) given to individuals. These norms are in tune with the RBI’s
recently issued mortgage norms and indicate a general regulatory stance towards
cooling speculative pressures in the property market. We believe HDFC’s earnings will
not face pressure from the new norms as it has an ample provision buffer.
Our expectations for FY11 and FY12
We assume loan growth of 21% (compared to 22-25% by Bloomberg consensus) for
FY11 and 22% for FY12, and core net interest spread of 2.7% and 2.5%, respectively.
Exhibit 37 shows the loan approval and disbursements trend for HDFC. We also expect
the company’s provision buffer of INR3.8b (excess provisions over the NHB’s norms) to
more than offset the incremental standard asset-provisioning need of INR3.2b. We had
downgraded HDFC ahead of the 3QFY11 results (see our report, “Richly valued”, dated
5 January 2011) on valuations. We see no significant re-rating catalysts in the near
term and term-funded institutions typically underperform in a tight liquidity environment.
We maintain our HOLD rating.
Key upside risks to our thesis and TP are portfolio flight to quality from other housingfinance
companies and a sooner-than-planned listing of the life-insurance subsidiary,
HDFC Standard Life. Downside risks are lower-than-expected loan growth and higherthan-
expected credit costs.
Key risks to our downgrade
Our rating downgrade is primarily because we find valuations expensive, we see no
significant re-rating catalysts in the near term and term-funded institutions typically
underperform in a tight liquidity environment. Key upside risks to our thesis and TP are
portfolio flight to quality from other housing-finance companies and a sooner-thanplanned
listing of the life-insurance subsidiary, HDFC Standard Life. Downside risks are
lower-than-expected loan growth and higher-than-expected credit costs.
Valuation
Our TP of INR660 consists of INR450 for the core mortgage book and INR210 for the
subsidiaries. Our TP is based on a three-stage residual income model, which assumes
8% risk-free rate, 6% equity-risk premium, beta of 1.0, 4% terminal growth rate and
10% terminal CoE. The core mortgage book trades at 3.1x adjusted P/BV and 17x P/E
on our FY12 estimates. At our TP, the core mortgage book is valued at 3.3x ABV and
18.5x P/E on our FY12 estimates.
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