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HDFC Ltd (HDFC IN)
OW: 4QFY11 – As safe as houses
Continued strength in new individual loan growth and rocksteady
spreads
Subs contributing incrementally more to profit growth
Maintain OW with target price revised up to INR760 from
INR756 implying a potential return of 16.4%
4QFY11 earnings: With core operating profits coming in marginally higher than expected
and the sale of its stake in Lafarge driving 23% profit growth (10% higher than expected), the
stock recovered its initial intraday 2% losses immediately after reporting earnings.
Operational review: The 9% y/y growth in total disbursements during 4Q11 comes on the
back of unusually high 36% growth last year. In fact, individual disbursements grew by a
robust 27% y/y. Firm home loan spreads at 2.33% and continued improvement in the cost
income ratio helped operating profits pre-capital gains grow by 17% y/y. The sale of its
Lafarge India holdings contributed to earnings growth, ramping up to 23% y/y. Substantially
reduced losses in its life insurance business and a higher contribution from its real estate fund
company helped consolidated earnings growth to reach 40% y/y.
Earnings outlook: We are increasing our estimates for FY12E and FY13E by 5% and
7%, respectively, largely on the back of higher capital gains. We look for continued
momentum in loan growth, steady margins contributing to 21% net profit CAGR up to
FY13E. An upside to this number is the potential write back of ‘teaser’ home-loan
provisions of INR4.47bn over the next two years. We see ROE increasing to a range of
23-25% by FY13E for the parent company.
Valuations and target price: We see HDFC as a safe harbour in a volatile market,
particularly as its subsidiaries increasingly contribute more to its growth and profitability. We
value HDFC using a weighted average combination of PE, PB, and economic profit model
(EPM) methodologies; and we incorporate sum-of-the-parts to value its non-mortgage
businesses. We value the stock at 24x PE and 5x PB and are raising our 12-month target price
to INR760 from INR756, implying a potential return, including dividend, of 16.4%. While we
are revising our earnings upwards, we are now rebalancing the weights of PE, PB and DCF in
our methodology from 75%, 15% and 10% to 50%, 20% and 30%, respectively to realign the
valuations with the near macro uncertainties and increasing risks to earnings’ growth for the
sector (details inside). Key risks: (1) Any sharp increase in rates could temporarily slow down
business momentum; (2) Asset quality risks
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC Ltd (HDFC IN)
OW: 4QFY11 – As safe as houses
Continued strength in new individual loan growth and rocksteady
spreads
Subs contributing incrementally more to profit growth
Maintain OW with target price revised up to INR760 from
INR756 implying a potential return of 16.4%
4QFY11 earnings: With core operating profits coming in marginally higher than expected
and the sale of its stake in Lafarge driving 23% profit growth (10% higher than expected), the
stock recovered its initial intraday 2% losses immediately after reporting earnings.
Operational review: The 9% y/y growth in total disbursements during 4Q11 comes on the
back of unusually high 36% growth last year. In fact, individual disbursements grew by a
robust 27% y/y. Firm home loan spreads at 2.33% and continued improvement in the cost
income ratio helped operating profits pre-capital gains grow by 17% y/y. The sale of its
Lafarge India holdings contributed to earnings growth, ramping up to 23% y/y. Substantially
reduced losses in its life insurance business and a higher contribution from its real estate fund
company helped consolidated earnings growth to reach 40% y/y.
Earnings outlook: We are increasing our estimates for FY12E and FY13E by 5% and
7%, respectively, largely on the back of higher capital gains. We look for continued
momentum in loan growth, steady margins contributing to 21% net profit CAGR up to
FY13E. An upside to this number is the potential write back of ‘teaser’ home-loan
provisions of INR4.47bn over the next two years. We see ROE increasing to a range of
23-25% by FY13E for the parent company.
Valuations and target price: We see HDFC as a safe harbour in a volatile market,
particularly as its subsidiaries increasingly contribute more to its growth and profitability. We
value HDFC using a weighted average combination of PE, PB, and economic profit model
(EPM) methodologies; and we incorporate sum-of-the-parts to value its non-mortgage
businesses. We value the stock at 24x PE and 5x PB and are raising our 12-month target price
to INR760 from INR756, implying a potential return, including dividend, of 16.4%. While we
are revising our earnings upwards, we are now rebalancing the weights of PE, PB and DCF in
our methodology from 75%, 15% and 10% to 50%, 20% and 30%, respectively to realign the
valuations with the near macro uncertainties and increasing risks to earnings’ growth for the
sector (details inside). Key risks: (1) Any sharp increase in rates could temporarily slow down
business momentum; (2) Asset quality risks
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