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Inherent strength continues, merger uncertain!
HDFC Ltd has witnessed large speculative news flows on its merger with
HDFC Bank, driving stock prices to a new high. However, our interaction
with the management provides details on “Merger - Not a near term
probability”. Recent RBI norms on SLR, CRR relief on infrastructure bonds
are not beneficial enough to push the merger ahead though it is
eventually the course to be followed.
Merger seems remote
We believe, post management discussion, infrastructure bonds (minimum
seven years) in small volumes are possible in the near term. However,
placement of a large quantum when inter-bank participation is disallowed
remains a challenge. The nature of these bonds is unsecured, uninsured,
long term and needs higher coupon to support. Only a few banks have
placed the bonds till now. Hence, placing bets on infra bonds replacing
huge borrowings of | 187000 crore seems an exaggeration.
Key addressable issues:
1. No clarity on treatment of the 22% stake held by HDFC Ltd in HDFC
Bank, with the management not indicating any methodology
2. The cap in HDFC Bank’s FII stake has not yet been approved to 74%
creating further confusion on the new holding structure
FDI hike in insurance awaited – may move ahead soon with IPO after FDI
HDFC Standard Life is expected to be listed soon after the Parliament
approves the FDI hike to 49%. However, clarity on the sub break-up of the
increased 23% stake (full FDI or FDI+FII/NRI) also remains crucial. It
reported a profit of | 730 crore in FY14 and also offered 5% maiden
dividend to the parent in FY14. Gross premium also grew at 7% YoY to
| 12063 crore with an individual business margin of 26%. Accordingly, we
have raised our margin expectation and valuation multiple valuing the
entity at ~| 14000 crore (FY16E). It adds | 65/share to HDFC’s TP.
Healthy growth trend in advances to continue
HDFC Ltd is the first specialised housing finance company (HFC) in India
and also the largest. Its total outstanding loan book stands at | 203384
crore as on Q1FY15 of which individual loans account for 70% while the
corporate proportion has declined to 32% from 36% in FY12. HDFC has
witnessed healthy traction of 18% CAGR in the past four years compared
to industry CAGR of 17% mainly driven by the individual loan segment.
The company has been able to maintain its leading position despite a
challenging macro environment. This is owing to its unique strengths
such as strong franchise, brand pedigree, in-house model, large network
and a dedicated business. We expect loan growth of 18% CAGR over
FY14-16E to | 272822 crore.
Healthy operational performance; remains portfolio stock…
HDFC has commanded premium valuations over the years due to its
consistent track record in earnings and business growth. Return ratios
have remained healthy across economic cycles with RoE >20% and RoA
>2.5%. We expect this to be maintained over FY14-16E with stable asset
quality. The consolidated PAT as on FY14 stood at | 7948 crore with
subsidiaries contributing 32%. Even consolidated RoEs have been healthy
at ~21%. Over FY14-16E, we expect standalone earnings CAGR of 14%
to | 7013 crore. We revise our SOTP based target price to | 1056 from
| 1000 earlier. We value the standalone housing finance business at 3x
FY16E ABV (2.8x earlier) and maintain our HOLD recommendation.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
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Inherent strength continues, merger uncertain!
HDFC Ltd has witnessed large speculative news flows on its merger with
HDFC Bank, driving stock prices to a new high. However, our interaction
with the management provides details on “Merger - Not a near term
probability”. Recent RBI norms on SLR, CRR relief on infrastructure bonds
are not beneficial enough to push the merger ahead though it is
eventually the course to be followed.
Merger seems remote
We believe, post management discussion, infrastructure bonds (minimum
seven years) in small volumes are possible in the near term. However,
placement of a large quantum when inter-bank participation is disallowed
remains a challenge. The nature of these bonds is unsecured, uninsured,
long term and needs higher coupon to support. Only a few banks have
placed the bonds till now. Hence, placing bets on infra bonds replacing
huge borrowings of | 187000 crore seems an exaggeration.
Key addressable issues:
1. No clarity on treatment of the 22% stake held by HDFC Ltd in HDFC
Bank, with the management not indicating any methodology
2. The cap in HDFC Bank’s FII stake has not yet been approved to 74%
creating further confusion on the new holding structure
FDI hike in insurance awaited – may move ahead soon with IPO after FDI
HDFC Standard Life is expected to be listed soon after the Parliament
approves the FDI hike to 49%. However, clarity on the sub break-up of the
increased 23% stake (full FDI or FDI+FII/NRI) also remains crucial. It
reported a profit of | 730 crore in FY14 and also offered 5% maiden
dividend to the parent in FY14. Gross premium also grew at 7% YoY to
| 12063 crore with an individual business margin of 26%. Accordingly, we
have raised our margin expectation and valuation multiple valuing the
entity at ~| 14000 crore (FY16E). It adds | 65/share to HDFC’s TP.
Healthy growth trend in advances to continue
HDFC Ltd is the first specialised housing finance company (HFC) in India
and also the largest. Its total outstanding loan book stands at | 203384
crore as on Q1FY15 of which individual loans account for 70% while the
corporate proportion has declined to 32% from 36% in FY12. HDFC has
witnessed healthy traction of 18% CAGR in the past four years compared
to industry CAGR of 17% mainly driven by the individual loan segment.
The company has been able to maintain its leading position despite a
challenging macro environment. This is owing to its unique strengths
such as strong franchise, brand pedigree, in-house model, large network
and a dedicated business. We expect loan growth of 18% CAGR over
FY14-16E to | 272822 crore.
Healthy operational performance; remains portfolio stock…
HDFC has commanded premium valuations over the years due to its
consistent track record in earnings and business growth. Return ratios
have remained healthy across economic cycles with RoE >20% and RoA
>2.5%. We expect this to be maintained over FY14-16E with stable asset
quality. The consolidated PAT as on FY14 stood at | 7948 crore with
subsidiaries contributing 32%. Even consolidated RoEs have been healthy
at ~21%. Over FY14-16E, we expect standalone earnings CAGR of 14%
to | 7013 crore. We revise our SOTP based target price to | 1056 from
| 1000 earlier. We value the standalone housing finance business at 3x
FY16E ABV (2.8x earlier) and maintain our HOLD recommendation.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
LINK
http://content.icicidirect.com/mailimages/IDirect_HDFCLtd_CoUpdate.pdf
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