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HDFC (HDFC.BO, Neutral): Benefit from rate cycle: Up to Neutral
What happened
We upgrade HDFC to Neutral from Sell on its strong growth momentum
and recent underperformance and likely benefits from falling interest
rates. HDFC is currently trading at 4.7X 12-m fwd book (3.6X FY13E
standalone). The company continues to command premium valuations,
given high ROEs and strong growth potential. Our ECS team expects the
RBI to cut interest rates aggressively by 150bp in FY13 and 50bp in FY14,
which coupled with potential cut in the CRR towards the end of FY12,
would be beneficial for wholesale borrower like HDFC.
Since we downgraded HDFC to Sell on Aug 31, 2010, the stock has
moved up 7% vs. a decline of 8.3% for BSE Sensex (past 12months -2.3%
vs. Sensex -16.3%). Given concerns of NPLs, HDFC with its clean book,
higher ROE and strong growth outperformed the market vs. other banks
in our view.
Current view
While other NBFCs under our coverage are struggling due to structural
or regulatory issues, HDFC is well positioned to maintain its growth
momentum. Furthermore, as a wholesale borrower, HDFC would benefit
from the benign interest rate environment which our ECS team
forecasts. We expect HDFC to realize earnings growth of 20% CAGR over
FY12-14E (highest among NBFCs) led by: a) 28bps expansion in spreads
over FY12014E; 2) healthy volumes growth of 22% CAGR over the same
period. However, we also expect heightened competition from PSU
banks due to declining growth opportunities in other sectors. Our
unchanged SOTP based target price is Rs690, implying an upside of 5%
and 5.3X 12-month forward P/B.
Risks
Upside: Sharp and aggressive rate cuts by RBI; Downside: Prolonged
economic slowdown and higher interest rates, higher competition from
PSU banks.
Sector report
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC (HDFC.BO, Neutral): Benefit from rate cycle: Up to Neutral
What happened
We upgrade HDFC to Neutral from Sell on its strong growth momentum
and recent underperformance and likely benefits from falling interest
rates. HDFC is currently trading at 4.7X 12-m fwd book (3.6X FY13E
standalone). The company continues to command premium valuations,
given high ROEs and strong growth potential. Our ECS team expects the
RBI to cut interest rates aggressively by 150bp in FY13 and 50bp in FY14,
which coupled with potential cut in the CRR towards the end of FY12,
would be beneficial for wholesale borrower like HDFC.
Since we downgraded HDFC to Sell on Aug 31, 2010, the stock has
moved up 7% vs. a decline of 8.3% for BSE Sensex (past 12months -2.3%
vs. Sensex -16.3%). Given concerns of NPLs, HDFC with its clean book,
higher ROE and strong growth outperformed the market vs. other banks
in our view.
Current view
While other NBFCs under our coverage are struggling due to structural
or regulatory issues, HDFC is well positioned to maintain its growth
momentum. Furthermore, as a wholesale borrower, HDFC would benefit
from the benign interest rate environment which our ECS team
forecasts. We expect HDFC to realize earnings growth of 20% CAGR over
FY12-14E (highest among NBFCs) led by: a) 28bps expansion in spreads
over FY12014E; 2) healthy volumes growth of 22% CAGR over the same
period. However, we also expect heightened competition from PSU
banks due to declining growth opportunities in other sectors. Our
unchanged SOTP based target price is Rs690, implying an upside of 5%
and 5.3X 12-month forward P/B.
Risks
Upside: Sharp and aggressive rate cuts by RBI; Downside: Prolonged
economic slowdown and higher interest rates, higher competition from
PSU banks.
Sector report
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