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HDFC
Reflections from FY11 Annual report
Event
We present our analysis from HDFC Ltd FY11 annual report and latest
presentation. Maintain Outperform with TP of Rs775.
Impact
Total adjustment done directly through reserves is closer to 5% of book
value: HDFC Ltd has debited the reserves to the tune of Rs8.3bn on account
of Zero coupon bond issuances (Rs5.3bn) and partially additional provision
mandated by regulator on teaser loans (Rs2.9bn). As a result, the book value
of HDFC Ltd is impacted (or reduced) by 5% roughly. The overall FY11 profit
of HDFC Ltd was close to Rs35.3bn.
Affordability has gone down but still at comfortable levels: The average
ticket size of loans disbursed during the period was Rs1.86m (up 10% YoY).
HDFC Ltd’s affordability chart indicates that affordability at the margin has
gone down but still is better than the levels seen during 2007-2008.
Perfectly matched book, well managed ALM: A look at the ALM profile
shows that close to 87% of assets are floating rate and around 85% of
liabilities are floating rate. Even the maturity of assets and liabilities in each
maturity bucket is well matched with the average duration being around
4.5years (calculated). All teaser loans close to Rs223bn (20% of overall loan
book) will reset to higher rates with effect from 1 April 2012 and that should
also help in protecting its spreads.
Asset quality – solid as ever: The annual report reveals that cumulatively
since inception the company has written off (net of recovery) Rs1.12bn of
loans which effectively is 4bps of cumulative disbursements.
Some other interesting observations: 1) Out of the total loans sold to
HDFC Bank in FY11, 93% of them qualify as priority sector for the bank. 2)
HDFC Ltd makes a spread of 1.57% on the current securitised AUM. Note
that the spread is closer to 1.3% on priority sector loans whereas it is higher
at 2.2% on non-PSL loans. 3) Fees paid to distribution agents are roughly
60bps of loans originated and has gone up 32% YoY. If we adjust for this from
the fee income, the core fees have gone up 9% YoY instead of a 5% reported
decline. 4) There has been a three-fold rise in investment provisions of
Rs225m done this year. Adjusted for that, the credit costs/charges has been
4bps. 5) Out of Rs295bn raised from banks by HDFC in FY11, only 9% were
eligible for PSL status compared to 37% last year.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs775.00 based on a Sum of Parts methodology.
Catalyst: Stable spreads and asset quality, listing of life insurance subsidiary.
Action and recommendation
Core mortgage business trades at reasonable valuations: HDFC Ltd’s
core mortgage business (after adjusting for valuations of subsidiaries) trades
at 3.0x FY13E P/BV for a sustainable ROE of closer to 30%. We maintain
Outperform with TP of Rs775.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC
Reflections from FY11 Annual report
Event
We present our analysis from HDFC Ltd FY11 annual report and latest
presentation. Maintain Outperform with TP of Rs775.
Impact
Total adjustment done directly through reserves is closer to 5% of book
value: HDFC Ltd has debited the reserves to the tune of Rs8.3bn on account
of Zero coupon bond issuances (Rs5.3bn) and partially additional provision
mandated by regulator on teaser loans (Rs2.9bn). As a result, the book value
of HDFC Ltd is impacted (or reduced) by 5% roughly. The overall FY11 profit
of HDFC Ltd was close to Rs35.3bn.
Affordability has gone down but still at comfortable levels: The average
ticket size of loans disbursed during the period was Rs1.86m (up 10% YoY).
HDFC Ltd’s affordability chart indicates that affordability at the margin has
gone down but still is better than the levels seen during 2007-2008.
Perfectly matched book, well managed ALM: A look at the ALM profile
shows that close to 87% of assets are floating rate and around 85% of
liabilities are floating rate. Even the maturity of assets and liabilities in each
maturity bucket is well matched with the average duration being around
4.5years (calculated). All teaser loans close to Rs223bn (20% of overall loan
book) will reset to higher rates with effect from 1 April 2012 and that should
also help in protecting its spreads.
Asset quality – solid as ever: The annual report reveals that cumulatively
since inception the company has written off (net of recovery) Rs1.12bn of
loans which effectively is 4bps of cumulative disbursements.
Some other interesting observations: 1) Out of the total loans sold to
HDFC Bank in FY11, 93% of them qualify as priority sector for the bank. 2)
HDFC Ltd makes a spread of 1.57% on the current securitised AUM. Note
that the spread is closer to 1.3% on priority sector loans whereas it is higher
at 2.2% on non-PSL loans. 3) Fees paid to distribution agents are roughly
60bps of loans originated and has gone up 32% YoY. If we adjust for this from
the fee income, the core fees have gone up 9% YoY instead of a 5% reported
decline. 4) There has been a three-fold rise in investment provisions of
Rs225m done this year. Adjusted for that, the credit costs/charges has been
4bps. 5) Out of Rs295bn raised from banks by HDFC in FY11, only 9% were
eligible for PSL status compared to 37% last year.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs775.00 based on a Sum of Parts methodology.
Catalyst: Stable spreads and asset quality, listing of life insurance subsidiary.
Action and recommendation
Core mortgage business trades at reasonable valuations: HDFC Ltd’s
core mortgage business (after adjusting for valuations of subsidiaries) trades
at 3.0x FY13E P/BV for a sustainable ROE of closer to 30%. We maintain
Outperform with TP of Rs775.
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