Reports on HDFC Q2FY12 results - by IDFC Sec

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HDFC Ltd (CMP: Rs673)            

Mkt Cap: Rs988bn; US$20.2bn       Bloomberg code (HDFC IN)

Q2FY12 result highlights

Quarterly performance: HDFC Ltd. reported PAT of Rs9.71bn in Q2FY12 (up 20% yoy), in line with our estimate of Rs9.66bn. NII (inclusive of dividends) came in at Rs13.1bn (18% yoy rise) led by stable NIMs and healthy advances growth of 20% yoy. The company reported other income of Rs2.5bn on the back of treasury income of Rs869m.

Key positives: Despite higher funding costs, margins (4.3%) and spreads (2.3%) remained stable yoy. Disbursements grew by a healthy 18% yoy resulting in loan growth of 20% yoy. The lender sold off loans worth Rs18.7bn during the quarter and credit growth, including loans sold, came in at 24% yoy. Fee and other charges witnessed traction during the quarter, coming in at Rs789m, vs. Rs681m in Q2FY11. HDFC’s asset quality remained firm with nil net NPAs.

Key negatives: Loan approvals moderated to 13.3% yoy from 28% yoy in Q2FY11. 

Impact on financials

We expect HDFC’s loan book to increase by a healthy 19% CAGR over FY11-13. Active spread management and strong pricing power in corporate loans would enable HDFC to maintain margins despite higher borrowing costs. We maintain our earnings estimates and expect steady margins and negligible credit costs to drive an 18% CAGR in earnings over FY11-13E, with an average RoE of 23% over the period.

Valuations & view

HDFC currently trades at 3.5x FY12E and 3x FY13E BV (excluding the value of its subsidiaries). Given its strong track record and sustainable high core RoEs, we expect HDFC to sustain its premium valuations. Valuing the core business at 4.4x FY12E book (3.8x FY13E) and building in a value of Rs205 per share for the subsidiaries, we assign a 12-month price target of Rs800 to the stock. Reiterate Outperformer.