HDFC Ltd -Beneficiary of secular demand:: Macquarie Research,

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HDFC Ltd
Beneficiary of secular demand
Event
 HDFC is the largest private mortgage player in India and the largest nonbanking
financial company in India. The company has a total loan book of
Rs1.1tn.

Impact
 Large beneficiary of a tightening regime: Contrary to popular perception,
we believe this time around a rising rate environment is likely to benefit HDFC
Ltd significantly. Competitive pressures are likely to ease as PSU banks
withdraw teaser-rate products. HDFC Ltd’s superior service standards should
enable it to recapture market share, in our view, as PSU banks were solely
competing on the basis of rate differentials, which can no longer be sustained.
 No problems at all on the developer portfolio: There have been no issues
with the developer portfolio with respect to repayments and they will continue
doing this business. They have not pulled back credit to this segment. The
historical loss rate is nil in this portfolio and they ensure adequate collateral
support while lending. Even in January 2009 when property prices had
collapsed, they had an intense review of their developer portfolio and found
out that the collateral value was 1.5x the loan amount.
 Dynamic resource management ability to keep spreads intact:
Irrespective of the interest-rate regime in which HDFC Ltd has operated,
spreads have consistently been maintained in the 2.1–2.3% range. This is
mainly due to its ability to dynamically manage its resource profile by
opportunistically taking recourse in retail deposits or wholesale funds, thereby
keeping a check on its cost of funds. A perfectly matched assets and liability
profile also enables it to consistently maintain spreads.
 Several important subsidiaries. The company also has several subsidiaries.
HDFC Bank is the second largest private bank in India while HDFC Standard
Life is one of the largest private life insurance players. HDFC Asset
Management runs the second largest mutual fund.
Action and recommendation
 One of our top picks and quality stock to own: HDFC Ltd remains one of
our top picks in the financial sector space.


HDFC Ltd Aide Memoire
1. What are the incremental spreads you are making on loans?
2. How has the cost of funds moved in the last six months?
3. What is your outlook on the liquidity tightness? Do you think it will ease in the next 2-3 months?
4. What is the loan growth you are expecting for 4Q11 and FY12?
5. Do you think rising rates are dampening demand for home loans?
6. Do you see competition easing in the loan market given most banks have withdrawn teaser rate products?
7. What is your average loan size to developers? Are you seeing any causes for concern in the portfolio?
8. Do you see affordability as a concern to loan growth with the rise in property prices?
9. With regard to HDFC Standard Life, what is the growth and margin outlook for FY11 and FY12?
10. What are the steps you have taken to improve margins in the life insurance business? How soon do you expect the results
to show?
11. Are you looking to list the life insurance business in FY12?