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HDFC
Takeaways from meeting with CEO
Event
ƒ We met the CEO of HDFC Ltd to get an update on some of the recent
regulatory issues. The key takeaway was that operational parameters – loan
growth, margins and asset quality – are likely to be stable. However, we also
came back concerned about the aggressive accounting practices followed to
report profits. Maintain Outperform with TP of Rs775.
Impact
ƒ Aggressive accounting practices likely to continue: Management clarified
that only provisions for NPLs as mandated by the regulator will be taken
through the P&L. However, excess provisions for NPLs and standard asset
provisions as and when required will be taken through reserves. Regulations
permit HDFC to deduct through special reserves. Even for ZCBs (Zero
coupon bonds), which have been issued to make investments in subsidiaries,
the implied interest expense will be passed through reserves, and HDFC will
re-issue the ZCBs as and when they mature over the next two years.
Management indicated that the investments made in subsidiaries/associates
like banks and insurance operations don’t get reflected in the P&L or balance
sheet at appropriate/fair value and that only dividends are reflected in its P&L.
ƒ Priority sector guidelines unlikely to change; securitisation guidelines
unlikely to have any material impact: The housing sector is expected to
remain under priority sector lending (PSL) norms and we think it’s unlikely to
change. Even bilateral assignments for housing loans are unlikely to be
moved out of the PSL tag. HDFC deducts all credit enhancements for
securitisation done through Tier-I. Even if the 9-month seasoning of loans for
securitisation is emphasized, the company has some back-book that it can
securitise, or there could be a temporary lull for about 6 months and then
securitisation could pick up. Finally, its borrowing from banks that has the PSL
tag has declined materially. For example, of Rs295bn raised from banks by
HDFC in FY11, only 9% was eligible for PSL status compared to 37% in
FY10. As a percentage of overall borrowings/funds, this figure is just 3%.
ƒ Capital requirements are unlikely to change, may only dilute when its
Tier-I is close to 7%: There has been no indication of any increase in capital
requirements by the regulator. HDFC may decide to raise capital when Tier-I
gets close to 7%. Even in FY07, when Tier-I was 7.6%, the credit rating
agencies were fine with their AAA rating. There are also warrants outstanding
that can be converted to equity, and the total dilution could be 3% and could
result in Tier-I increasing by 16-17% once the dilution occurs.
Earnings and target price revision
ƒ No change.
Price catalyst
ƒ 12-month price target: Rs775.00 based on a Sum of Parts methodology.
ƒ Catalyst: Stable spreads/asset quality, listing of life insurance sub in CY12
Action and recommendation
ƒ Maintain Outperform with TP of Rs775.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC
Takeaways from meeting with CEO
Event
ƒ We met the CEO of HDFC Ltd to get an update on some of the recent
regulatory issues. The key takeaway was that operational parameters – loan
growth, margins and asset quality – are likely to be stable. However, we also
came back concerned about the aggressive accounting practices followed to
report profits. Maintain Outperform with TP of Rs775.
Impact
ƒ Aggressive accounting practices likely to continue: Management clarified
that only provisions for NPLs as mandated by the regulator will be taken
through the P&L. However, excess provisions for NPLs and standard asset
provisions as and when required will be taken through reserves. Regulations
permit HDFC to deduct through special reserves. Even for ZCBs (Zero
coupon bonds), which have been issued to make investments in subsidiaries,
the implied interest expense will be passed through reserves, and HDFC will
re-issue the ZCBs as and when they mature over the next two years.
Management indicated that the investments made in subsidiaries/associates
like banks and insurance operations don’t get reflected in the P&L or balance
sheet at appropriate/fair value and that only dividends are reflected in its P&L.
ƒ Priority sector guidelines unlikely to change; securitisation guidelines
unlikely to have any material impact: The housing sector is expected to
remain under priority sector lending (PSL) norms and we think it’s unlikely to
change. Even bilateral assignments for housing loans are unlikely to be
moved out of the PSL tag. HDFC deducts all credit enhancements for
securitisation done through Tier-I. Even if the 9-month seasoning of loans for
securitisation is emphasized, the company has some back-book that it can
securitise, or there could be a temporary lull for about 6 months and then
securitisation could pick up. Finally, its borrowing from banks that has the PSL
tag has declined materially. For example, of Rs295bn raised from banks by
HDFC in FY11, only 9% was eligible for PSL status compared to 37% in
FY10. As a percentage of overall borrowings/funds, this figure is just 3%.
ƒ Capital requirements are unlikely to change, may only dilute when its
Tier-I is close to 7%: There has been no indication of any increase in capital
requirements by the regulator. HDFC may decide to raise capital when Tier-I
gets close to 7%. Even in FY07, when Tier-I was 7.6%, the credit rating
agencies were fine with their AAA rating. There are also warrants outstanding
that can be converted to equity, and the total dilution could be 3% and could
result in Tier-I increasing by 16-17% once the dilution occurs.
Earnings and target price revision
ƒ No change.
Price catalyst
ƒ 12-month price target: Rs775.00 based on a Sum of Parts methodology.
ƒ Catalyst: Stable spreads/asset quality, listing of life insurance sub in CY12
Action and recommendation
ƒ Maintain Outperform with TP of Rs775.
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