Our analysis of HDFC’s FY12 annual report highlights the well known fact about lower book value accretion (refer our report, ‘HDFC: Demystifying forex equation’, dated January 19, ’12) due to utilization of reserves for standard asset provisioning (INR3.5bn) and interest on zero coupon bonds (INR4.8bn) equivalent to 20% of earnings. However, knock due to ZCB interest was lower than expectation due to tax benefit on the same (absent in FY11). Key observations include: 1) gross NPLs more than doubled in non-individual category and 2) sell downs to HDFC Bank contributing 4-5% to net interest income. Repricing of dual rate home loans (INR223bn) w.e.f. April and warrant conversion by August, ‘12, will support NIMs and reversal of standard provisioning on dual rate loans will aid net worth in FY14. Our SOTP fair value is INR672/share (FY13E), valuing the core book at 4.2x. We maintain‘HOLD’.
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· NPLs in non-individual category more than doubled in absolute term (1.55% against 0.84% in FY11), rising for the fourth year in a row (from 0.42% in FY08). On the contrary, individual loans consistently showed a dip to 0.55% in FY12.
· ZCBs: Blended cost net of tax adjusted against net worth as per its accounting policy: In line with expectation, INR7.1bn of interest on ZCBs was adjusted against reserves. However, in FY12, adjustment was made net of tax at INR4.85bn, creating tax provision on the same (absent in FY11). In our estimates for FY13 and FY14, we now adjust interest (net of tax) from net worth instead of gross interest.
· Standard asset provisioning continues to be adjusted against reserves: It utilized INR5.2bn (net of tax INR3.5bn) from reserves towards incremental standard asset provisioning on non-individual loans at 1% and individual loans at 0.4%.
· Foreign currency denominated liability has come off to USD874mn, mainly due to repayment of loans from IFC, DEG and FCNR (from domestic banks). The net open position on forex exposure as at FY12 was USD244mn (including cross currency swaps). It has created foreign currency translation reserves of INR2.06bn, after taking INR1.3bn hit on P&L in FY12. Every ‾4-5% movement in INR/USD rate, will impact reserves by INR1.5‐2.0bn.
· Sell down to HDFC Bank: 10% of loans, 4% of NII: Aggregate portfolio sold down to HDFC Bank stands at INR145bn (10% of the loan book, ‾15% of individual loans). 1.53% of interest on the same contributes 4% of net interest income.
Regards,
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