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Housing Development Finance Corp. Ltd.
1QFY12: Yet another
consistent performance; Buy
1QFY11 Earnings: exactly in line; volume momentum strong
HDFC yet again delivered a consistent performance, with earnings growth coming
in at 22% yoy in 1Q12 (at Rs8.5bn), exactly in line. This is despite macro
headwinds and rising rates. The core top line grew by 17% yoy (in line), led by
volume growth of 22% yoy, with retail volume growth of 21% yoy. More
importantly, the rate of sanction and disbursement growth also remains strong, at
22% and 20%, respectively, yoy. Retail disbursement growth was also strong, at
21% yoy. Spreads are more or less stable, at 2.3% both yoy and qoq, as was the
margin yoy at ~4.0%.
Asset quality remains comfortable; Tier 1 strong
Asset quality remains comfortable, with gross at 83bps (up 6bps qoq, but
seasonal), with HDFC carrying excess provision of +Rs3.0bn in case NHB
enforces 40bps on standard assets. Tier 1 at 12.2%.
EPS growth to sustain at ~18%, but profit growth at +20%
We estimate earnings growth of ~18% for FY12/13, but net profits should grow by
+20% each for FY12/13, led by volume growth of ~20% and stable spreads.
Earnings growth will be lower, due to our factoring in a warrant conversion in
FY12. RoEs are likely to sustain at +21% in FY12/13 (+23% pre-warrant
conversion). Our FY12/13 estimates adjust to Rs24.52 and Rs28.63.
Maintain Buy and PO at Rs800; may trade on P/E vs P/B
We maintain our Buy rating and our PO of Rs800. We believe HDFC is a quality
“defensive growth” stock; valuations for the stock are more “PE” led than BV led.
The stock, trading at ~22-23x FY11 earnings (adj. for subs), can continue to trade
at similar multiples one-year out, given profit growth of +21/20% in FY12/13.
1QFY12 result takeaways
HDFC yet again delivered a consistent performance, with earnings growth coming
in at 22% yoy in 1Q12 (at Rs8.5bn) exactly in line. This is despite macro
headwinds and rising rates. We highlight key result takeaways:
• Core top line grew 17% yoy (in line), led by volume of 22% yoy, with
retail volume growth of 21% yoy. More importantly, the rate of sanction
and disbursement growth also remains strong, at 22% and 20%,
respectively, yoy. Retail disbursement growth was also strong, at 21%
yoy. AUM (including sell-down to HDFC Bk) growth was at 21% yoy.
• Spreads are more or less stable,, at 2.3% yoy and qoq, as were margins
yoy, at ~4.0%, but they declined qoq by <10bps, in our estimate.
• Fee income growth was strong, at +145% yoy, as HDFC indicated that
fee source has jump-started again vs. last year, when customers (more
so, corporates) were abstaining from paying loan fees.
• Operating expenses have increased ~30% qoq, owing to bonus payout.
The cost Income ratio was at 8.7%.
• Asset quality remains comfortable, with gross at 83bps (up 6bps qoq,
but seasonal), with HDFC carrying excess provision of ~Rs3.0bn in case
NHB enforces 40bps on standard assets.
• Total CAR at 13.8%, with Tier 1 at 12.2%.
Earnings growth to sustain at +20%
We estimate earnings growth of ~18% for FY12/13, but net profit should grow by
+20% each for FY12/13, led by volume growth of ~20% and stable spreads.
Earnings growth will be lower, due to our factoring in a warrant conversion in
FY12. The key earnings growth drivers are:
Loan growth of +19-20%, as structural growth drivers remain strong;
Spreads should remain manageable in the +2.2-2.3% range, as HDFC has
the ability to hike lending rates to counter funding cost increases (we are still
~100bps away before demand starts to hurt) and reprice its corporate book
as HDFC has reset clauses built in, allowing it to reprice the loans.
On the asset-quality front, HDFC still has a LTV of ~50% and, on an
incremental basis, it is around 65%. Further, in the case of developer loans
(10-11% of loans), the LTV is even lower in most cases.
Overall, RoEs are likely to sustain at +21% in FY12/13 (rising to +23% vs. ~22%
in FY11, pre-warrant conversion).
Maintain subs. value at Rs166/shr.
We maintain our subs value at Rs166, which includes life insurance value at
Rs34/shr., HDFC Bk at Rs193/shr. and the balance is AMC biz. at Rs21/shr., pre
~10% hold’co discount.
Maintain PO at Rs800; may trade on PE vs. PB
We maintain Buy rating and our PO of Rs800. We believe HDFC is a quality
“defensive growth” stock; valuations for the stock are more “PE” led than BV led.
Hence, the stock, trading at ~23x FY11 earnings (adj. for subs), can continue to
trade at similar multiples 1-year out, given profit growth of +21/20% in FY12/13.
Price objective basis & risk
HDFC (HGDFF)
We set our PO at Rs800 to factor in 1) overall growth momentum sustaining,
especially in retail and 2) we believe HDFC is likely to deliver RoEs of +23% (prewarrants)
on profit growth of 21/20% in FY12/13. Our PO is based on a premium
to the Gordon model theory. Moreover, we believe HDFC being a quality
defensive growth stock, valuations for the stock tend to be more PE led than BV
led. Hence, the stock, trading at 23x FY11 earnings (adj. for subs), can continue
to trade at similar multiples 1-year out, given profit growth of +21/20% in FY12/13.
We think there may be upside to our SOTP (Rs166/shr), especially from HDFC
Bk (expanding distribution and market share) and life insurance. A sharp rise in
NPLs and an inability to maintain growth are risks to our price objective.
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