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Action: Initiate coverage with a BUY rating and a TP of INR780
We are positive on HDFC, given its stable earnings profile and consistent
performance through the interest rate cycles. HDFC’s lean cost structure,
stable spreads and provision buffer should ensure high core RoE of 30%.
We expect strong loan book growth of 20% over FY12F-13F
We expect HDFC to post strong loan book growth of 19% and 20% for
FY12F and FY13F, respectively, despite high interest rates on account of
the loyalty profile of its customers, diversified scale of operations and
healthy growth in its sanction pipeline.
We expect stable spreads and low credit costs over FY12F-13F
HDFC has demonstrated its ability to maintain spreads above 2.2%
through the past two rate cycles and we expect it to sustain its spreads.
We expect HDFC's robust risk management process and high provision
cushion (at 102% of NPLs) to ensure credit costs stay around 7bps over
FY12F-13F. We also expect HDFC's lean opex structure to help drive
blended RoE and RoA of 21% and 2.75%, respectively, for FY13F.
Valuation: HDFC trades at 2.5x FY13F ABV and 13.4x FY13F EPS
HDFC trades at 2.5x FY13F ABV of INR169.69 and 13.4x FY13F EPS of
INR31.39. We value HDFC’s core mortgage at INR555 and subsidiaries at
INR225 to arrive at our SOTP-based TP of INR780. At our TP, HDFC
would trade at 3.3x our FY13F ABV and 17.7x FY13F EPS.
Catalysts: Easing rate cycle, moderation in residential realty prices
Valuation
Initiate with BUY; TP of INR780
We expect HDFC Ltd to grow its loan book at a CAGR of 19.5% over FY11-13F. We
expect this to drive a revenue and PAT CAGR of 22% and 21%, respectively, over this
period after factoring in flat margins of 3.1%. We expect HDFC to record an ROA of
2.75% and an adjusted ROE of 2.75% in FY13F. HDFC currently trades at around its
historical mean at 2.4x FY13F ABV. At our TP of 780, the implied P/ABV for FY13F is
3.27x. We arrive at our target price of INR780.00 using SOTP for the subsidiaries with a
value of INR 225 and three-stage residual-income valuation method for the core with the
following assumptions:
1) We estimate loan book growth of 19.2% for FY12F and 19.8% for FY13F, versus the
management guidance of 20% over FY12-13.
2) We expect fee income to grow at 9.2% in FY12F and by 12.3% in FY13F.
3) We expect NIM to stay flat at 3.1% in each of FY12F and FY13F, little changed from
3.2% in 2QFY12. Management has indicated that X-X% is a sustainable range for
interest spreads.
4) On the bad loan front, we are building in increases in GNPLs to INR14.5bn (0.86%
of loan book) by FY13F from INR9bn in FY11.
5) HDFC currently has a capital adequacy ratio of 13.8% with about 11.7% in tier-1.
We are not building any dilution from capital raising into our model.
6) We expect the cost-to-income ratio to be at 8.3% in FY13F from 8.2% in FY11. We
expect the cost-asset ratio to stay flat at 0.36% for FY13F compared to 0.36% in
FY11.
7) We expect pro forma diluted EPS of INR26.4 for FY12F and INR31.4 for FY13F. At
2.5 our FY12F ABV and 13.4 our FY13F diluted EPS, we believe the stock looks
attractive. Our target price of INR780 implies 3.3x our FY13F adjusted BV (adjusted
ROE of 21.3% for FY13F) and 17.7x our FY13F EPS.
Key catalysts: Accelerated monetary policy easing and a reduction in residential
property prices are the key upside catalysts.
Key risks: The RBI persisting with a tight money policy, policy logjam with respect to
power sector bottlenecks and continued global macro uncertainties.
Residual income valuation
We have built the following assumptions into our three-stage residual-income model:
1) We expect HDFC to post a 17.9% CAGR for its average interest-earning assets
over FY11-14F, compared to an industry average of 17%, on our numbers. We
expect this to be followed by a CAGR of 16.7% over FY14F-20F and a terminal
growth rate of 4% beyond that.
2) We have modelled an average ROE of 22% over FY12F-20F and a 24.1% terminal
value ROE. Our discount rates range from 14.25% (current cost of equity) for FY11-
14F, 12% for FY14F-20F and a 10% terminal rate.
3) We are factoring in INR32.7bn of capital addition in 2QFY13 on account of
conversion of 10.95mn outstanding warrants into equity shares at INR600 per share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action: Initiate coverage with a BUY rating and a TP of INR780
We are positive on HDFC, given its stable earnings profile and consistent
performance through the interest rate cycles. HDFC’s lean cost structure,
stable spreads and provision buffer should ensure high core RoE of 30%.
We expect strong loan book growth of 20% over FY12F-13F
We expect HDFC to post strong loan book growth of 19% and 20% for
FY12F and FY13F, respectively, despite high interest rates on account of
the loyalty profile of its customers, diversified scale of operations and
healthy growth in its sanction pipeline.
We expect stable spreads and low credit costs over FY12F-13F
HDFC has demonstrated its ability to maintain spreads above 2.2%
through the past two rate cycles and we expect it to sustain its spreads.
We expect HDFC's robust risk management process and high provision
cushion (at 102% of NPLs) to ensure credit costs stay around 7bps over
FY12F-13F. We also expect HDFC's lean opex structure to help drive
blended RoE and RoA of 21% and 2.75%, respectively, for FY13F.
Valuation: HDFC trades at 2.5x FY13F ABV and 13.4x FY13F EPS
HDFC trades at 2.5x FY13F ABV of INR169.69 and 13.4x FY13F EPS of
INR31.39. We value HDFC’s core mortgage at INR555 and subsidiaries at
INR225 to arrive at our SOTP-based TP of INR780. At our TP, HDFC
would trade at 3.3x our FY13F ABV and 17.7x FY13F EPS.
Catalysts: Easing rate cycle, moderation in residential realty prices
Valuation
Initiate with BUY; TP of INR780
We expect HDFC Ltd to grow its loan book at a CAGR of 19.5% over FY11-13F. We
expect this to drive a revenue and PAT CAGR of 22% and 21%, respectively, over this
period after factoring in flat margins of 3.1%. We expect HDFC to record an ROA of
2.75% and an adjusted ROE of 2.75% in FY13F. HDFC currently trades at around its
historical mean at 2.4x FY13F ABV. At our TP of 780, the implied P/ABV for FY13F is
3.27x. We arrive at our target price of INR780.00 using SOTP for the subsidiaries with a
value of INR 225 and three-stage residual-income valuation method for the core with the
following assumptions:
1) We estimate loan book growth of 19.2% for FY12F and 19.8% for FY13F, versus the
management guidance of 20% over FY12-13.
2) We expect fee income to grow at 9.2% in FY12F and by 12.3% in FY13F.
3) We expect NIM to stay flat at 3.1% in each of FY12F and FY13F, little changed from
3.2% in 2QFY12. Management has indicated that X-X% is a sustainable range for
interest spreads.
4) On the bad loan front, we are building in increases in GNPLs to INR14.5bn (0.86%
of loan book) by FY13F from INR9bn in FY11.
5) HDFC currently has a capital adequacy ratio of 13.8% with about 11.7% in tier-1.
We are not building any dilution from capital raising into our model.
6) We expect the cost-to-income ratio to be at 8.3% in FY13F from 8.2% in FY11. We
expect the cost-asset ratio to stay flat at 0.36% for FY13F compared to 0.36% in
FY11.
7) We expect pro forma diluted EPS of INR26.4 for FY12F and INR31.4 for FY13F. At
2.5 our FY12F ABV and 13.4 our FY13F diluted EPS, we believe the stock looks
attractive. Our target price of INR780 implies 3.3x our FY13F adjusted BV (adjusted
ROE of 21.3% for FY13F) and 17.7x our FY13F EPS.
Key catalysts: Accelerated monetary policy easing and a reduction in residential
property prices are the key upside catalysts.
Key risks: The RBI persisting with a tight money policy, policy logjam with respect to
power sector bottlenecks and continued global macro uncertainties.
Residual income valuation
We have built the following assumptions into our three-stage residual-income model:
1) We expect HDFC to post a 17.9% CAGR for its average interest-earning assets
over FY11-14F, compared to an industry average of 17%, on our numbers. We
expect this to be followed by a CAGR of 16.7% over FY14F-20F and a terminal
growth rate of 4% beyond that.
2) We have modelled an average ROE of 22% over FY12F-20F and a 24.1% terminal
value ROE. Our discount rates range from 14.25% (current cost of equity) for FY11-
14F, 12% for FY14F-20F and a 10% terminal rate.
3) We are factoring in INR32.7bn of capital addition in 2QFY13 on account of
conversion of 10.95mn outstanding warrants into equity shares at INR600 per share.
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