HDFC is in an enviable position – funding cost is
falling while loan yields are holding up (base rate
driven). This is causing spreads to expand while
gaining market share. Top line is expected to grow
at 20%+ over three years, which should help
multiples (at long-term average now) expand.
Funding costs have fallen sharply over the last few
weeks: There is an element of seasonality, and rates
usually decline in April and May. However, quantum of
decline this year is sharp – across various maturities,
HDFC’s borrowing costs have declined by almost
80-90bp. With inflation falling, this decline can be sticky.
At the same time, lending rates are holding up:
Given elevated LD ratios, banks are struggling to cut
deposit and hence base rates. This is helping HDFC
earn high incremental spreads. While banks will cut
base rates at some time, spreads for HDFC are likely to
remain resilient. On an incremental basis, HDFC is
earning an individual loan spread of 2.1-2.2%, which is
much higher than spreads on the individual loan portfolio,
in our view.
The lack of price competition is helping HDFC gain
share: Unlike previous cycles, when banks competed
on rates, this time they are unable to. As a result, HDFC
is growing at almost 10ppt more than the system. We
expect NII growth to top 20% for the next three years.
Strong growth, strong balance sheet, and average
multiples imply big upside potential: The stock is
trading at 3.7x book and 18x earnings (on core basis) on
F2014E. While this is not cheap on an absolute basis, it
is not expensive given HDFC’s earnings and balance
sheet profile. We expect multiples to expand well above
average levels. Our new 12-month PT, up on a higher
valuation for the parent, implies stock will trade at 4.1x
book and 19x P/E on F2015E.
��
-->
falling while loan yields are holding up (base rate
driven). This is causing spreads to expand while
gaining market share. Top line is expected to grow
at 20%+ over three years, which should help
multiples (at long-term average now) expand.
Funding costs have fallen sharply over the last few
weeks: There is an element of seasonality, and rates
usually decline in April and May. However, quantum of
decline this year is sharp – across various maturities,
HDFC’s borrowing costs have declined by almost
80-90bp. With inflation falling, this decline can be sticky.
At the same time, lending rates are holding up:
Given elevated LD ratios, banks are struggling to cut
deposit and hence base rates. This is helping HDFC
earn high incremental spreads. While banks will cut
base rates at some time, spreads for HDFC are likely to
remain resilient. On an incremental basis, HDFC is
earning an individual loan spread of 2.1-2.2%, which is
much higher than spreads on the individual loan portfolio,
in our view.
The lack of price competition is helping HDFC gain
share: Unlike previous cycles, when banks competed
on rates, this time they are unable to. As a result, HDFC
is growing at almost 10ppt more than the system. We
expect NII growth to top 20% for the next three years.
Strong growth, strong balance sheet, and average
multiples imply big upside potential: The stock is
trading at 3.7x book and 18x earnings (on core basis) on
F2014E. While this is not cheap on an absolute basis, it
is not expensive given HDFC’s earnings and balance
sheet profile. We expect multiples to expand well above
average levels. Our new 12-month PT, up on a higher
valuation for the parent, implies stock will trade at 4.1x
book and 19x P/E on F2015E.
No comments:
Post a Comment