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India Equity Research Reports, IPO and Stock News
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● We recently hosted HDFC management (Mr Deepak Parekh,
Chairman; Mr Keki Mistry, CEO; and Ms Karnad, MD) for an NDR.
● Management highlighted that even after raising lending rates by
125 bp over the past six months, with affordability still robust
(particularly outside metros), it is confident of maintaining loan
growth (gross) at 20%+ levels in FY12 and the medium term.
● Over the past two months, competitive intensity has also eased,
with SBI raising rates as well as pulling back on growth. The lending
rate hikes and the fact that it runs no ALM mismatches, should help
HDFC maintain stable spreads (2.2-2.3%). Management is
confident of stable asset quality (0.8% gross NPLs).
● Management expects the life insurance business profitability,
which got hit from the new regulations, to recover over the next
two years. It will look at an IPO of this subsidiary in 2012. At 3.8x
FY12E core mortgage book value and 17x FY12E core earnings,
we maintain our NEUTRAL rating with a target price of Rs725.
20%-plus growth to sustain in FY12
Management highlighted that it was confident of maintaining 20%-plus
gross loan growth in FY12 despite raising rates by 125 bp over the
past six months. It also believes that the company has the pricing
power for a further 150-200 bp hike, which should not impact growth.
While there is a slowdown at metros such as Mumbai and Delhi, tier-II
cities continue to witness robust mortgage demand. The average
mortgage ticket size for HDFC is only at Rs1.9 mn and loan-to-value
is still at 68%. Competitive intensity has also eased post the
management change at SBI.
Spreads to be stable
The lending rate increases and the fact that it runs no ALM
mismatches, should help HDFC maintain stable spreads (2.2-2.3%). It
has also been reducing its dependence on bank funding, with
increased share of retail deposits (cost effective in tight liquidity). Over
the past two months, it has raised US$1 bn of retail deposits (4% of
total deposits). HDFC’s reliance on bank funding has reduced, as
appetite for HDFC’s debentures has increased for insurance, pension
and provident funds.
Insurance business margins to recover to 18-19% levels
HDFC Life has been the fastest growing private sector player in FY11;
the 2H11 new business growth was 2% for HDFC Life versus degrowth
of 41% for industry. Its market share improved to 13% in FY11
(from 9% in FY10) and persistency to 81% (from 68%). Opex (costoverruns
were only Rs1.4 bn in FY11) and commission ratios
continued to drop. However, after the new regulations, new business
margins dropped sharply to 19% in FY11 (from 28% in 1H11).
Management is confident of moving to 18-19% over the next two
years with improving productivity, changing product mix and costcutting
measures. Capital needs should be minimal. HDFC Std Life
expects to breakeven in FY12 and is also looking to list in 2012.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● We recently hosted HDFC management (Mr Deepak Parekh,
Chairman; Mr Keki Mistry, CEO; and Ms Karnad, MD) for an NDR.
● Management highlighted that even after raising lending rates by
125 bp over the past six months, with affordability still robust
(particularly outside metros), it is confident of maintaining loan
growth (gross) at 20%+ levels in FY12 and the medium term.
● Over the past two months, competitive intensity has also eased,
with SBI raising rates as well as pulling back on growth. The lending
rate hikes and the fact that it runs no ALM mismatches, should help
HDFC maintain stable spreads (2.2-2.3%). Management is
confident of stable asset quality (0.8% gross NPLs).
● Management expects the life insurance business profitability,
which got hit from the new regulations, to recover over the next
two years. It will look at an IPO of this subsidiary in 2012. At 3.8x
FY12E core mortgage book value and 17x FY12E core earnings,
we maintain our NEUTRAL rating with a target price of Rs725.
20%-plus growth to sustain in FY12
Management highlighted that it was confident of maintaining 20%-plus
gross loan growth in FY12 despite raising rates by 125 bp over the
past six months. It also believes that the company has the pricing
power for a further 150-200 bp hike, which should not impact growth.
While there is a slowdown at metros such as Mumbai and Delhi, tier-II
cities continue to witness robust mortgage demand. The average
mortgage ticket size for HDFC is only at Rs1.9 mn and loan-to-value
is still at 68%. Competitive intensity has also eased post the
management change at SBI.
Spreads to be stable
The lending rate increases and the fact that it runs no ALM
mismatches, should help HDFC maintain stable spreads (2.2-2.3%). It
has also been reducing its dependence on bank funding, with
increased share of retail deposits (cost effective in tight liquidity). Over
the past two months, it has raised US$1 bn of retail deposits (4% of
total deposits). HDFC’s reliance on bank funding has reduced, as
appetite for HDFC’s debentures has increased for insurance, pension
and provident funds.
Insurance business margins to recover to 18-19% levels
HDFC Life has been the fastest growing private sector player in FY11;
the 2H11 new business growth was 2% for HDFC Life versus degrowth
of 41% for industry. Its market share improved to 13% in FY11
(from 9% in FY10) and persistency to 81% (from 68%). Opex (costoverruns
were only Rs1.4 bn in FY11) and commission ratios
continued to drop. However, after the new regulations, new business
margins dropped sharply to 19% in FY11 (from 28% in 1H11).
Management is confident of moving to 18-19% over the next two
years with improving productivity, changing product mix and costcutting
measures. Capital needs should be minimal. HDFC Std Life
expects to breakeven in FY12 and is also looking to list in 2012.
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