HDFC 2Q12: Worries over accounting adjustments :Macquarie Research,

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HDFC
2Q12: Worries over accounting
adjustments
Event
 Nos slightly above our estimates due to treasury profits: HDFC reported
2Q12 PAT of Rs9.71bn, up 20% YoY and slightly above our estimates of
Rs9.6bn (same as Bloomberg consensus). The earnings surprise was mainly
due to higher treasury income as gains on Intelenet (not listed) stake sale of
Rs500m were booked this quarter.
Impact
 Adjustments through reserves not a conservative accounting practice:
The company deducted Rs4.4bn through reserves this quarter. This is 45% of
the quarter’s profit.
 Rs2.5bn was deducted to meet the enhanced standard asset provisioning
requirement of 0.4% for non teaser retail loans. HDFC used to make
~10bp provisioning earlier on these loans.
 Rs1.9bn was debited through the securities premium reserve for the ZCB
(Zero coupon bond) issuances done. This figure is up from ~Rs1.5bn in
1Q12. The increase in expense has been due to ~Rs20bn of bonds
coming up for rollover this August and they have been reissued at more
than 200bp higher coupon than the original issuance. At this rate total
debit due to ZCBs for FY12E would be Rs7.2bn, up 33% from FY11.
 Fundamentals on track: Loan growth was steady at 20% YoY (21% adjusted
for loans sold). Retail loans sanctions and disbursals were up 18% YoY and
19% YoY respectively for 1H12.
 Dynamic resource management helps in maintaining spread: Spreads
were nearly flat QoQ at 2.28%. 78% of the incremental funding of Rs16bn in
the quarter came from deposits which were available at lower rates of 9.50-
9.75% than bank base rates which are ~10.5%. HDFC also deployed Rs25bn
of liquid funds into loans this quarter.
 Other takeaways from call with management. FY12E loan growth likely to
be 20% YoY. Spreads should be maintained at 2.2-2.3%. Management does
not see any pressures on asset quality.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs775.00 based on a Sum of Parts methodology.
 Catalyst: Positive earnings surprises, strong growth and stable spreads
Action and recommendation
 Maintain Outperform: We would recommend long-term investors to hold
onto the stock. Reiterate outperform with TP of Rs775.