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HDFC Ltd's ability to maintain spreads over interest rate cycles is commendable. A well balanced
asset liability maturity profile and easing competitive pressure, post the withdrawal of teaser
rates, provide comfort. We believe the rate hike cycle is close to its peak. We upgrade to Hold
with a new Rs651 target price.
Relatively favourable marketplace: HDFC’s ability to maintain spreads is impressive
We believe rate competition for mortgage loans has eased somewhat post the withdrawal of dual
rate/teaser home loan products. The elevated interest rate structure and the flat yield curve in the
system will likely put some pressure on spreads in general. However, we observe that HDFC was
consistently able to maintain spreads around 2.2-2.3% during FY03-11 (Chart 1). This ability to
maintain spreads despite the interest rate cycle provides us comfort. Business growth was
healthy and fairly balanced in FY11. The individual and corporate loan books each grew around
20% yoy in FY11 (Table 2 and Charts 4 & 5).
Good value in unlisted investments; nurturing education finance business
HDFC has long-standing investments in unlisted companies (Table 4) that have generated good
value over time. Also, in a relatively small way, HDFC has entered the education business by
investing Rs230m for a stake of about 62.3% and Rs180m in convertible preference shares in
Credila Financial Services Private Limited, an education-financing NBFC. Given the underlying
macro opportunity (Charts 7, 8 and 9), we believe this business has substantial potential going
forward. However, we have not factored in the value of unlisted investments and HDFC’s stake in
Credila in HDFC’s SOTP valuation, given the relatively small size of Credila’s business currently.
Interest rate cycle looks close to peak: upgrade to Hold with a new Rs651 target price
We believe the Reserve Bank of India (RBI) will conclude the tightening cycle by raising the repo
rate by another 25bp (see RBS economist Sanjay Mathur’s report Qualified hawkishness, 16
June 2011), which is potentially a better environment for non-banking financial companies. We
increase our SOTP-based target price to Rs651 (from Rs558), due to our higher valuation of the
core mortgage business and revaluation of listed associate companies. Our estimates now factor
in the warrant conversion in FY13. At the current price, the core mortgage business trades at 3.9x
FY13F book value (Table 8). Note we have charged off interest on ZCB (actual interest for FY10
and FY11 and estimate for FY12-14) to the income statement
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC Ltd's ability to maintain spreads over interest rate cycles is commendable. A well balanced
asset liability maturity profile and easing competitive pressure, post the withdrawal of teaser
rates, provide comfort. We believe the rate hike cycle is close to its peak. We upgrade to Hold
with a new Rs651 target price.
Relatively favourable marketplace: HDFC’s ability to maintain spreads is impressive
We believe rate competition for mortgage loans has eased somewhat post the withdrawal of dual
rate/teaser home loan products. The elevated interest rate structure and the flat yield curve in the
system will likely put some pressure on spreads in general. However, we observe that HDFC was
consistently able to maintain spreads around 2.2-2.3% during FY03-11 (Chart 1). This ability to
maintain spreads despite the interest rate cycle provides us comfort. Business growth was
healthy and fairly balanced in FY11. The individual and corporate loan books each grew around
20% yoy in FY11 (Table 2 and Charts 4 & 5).
Good value in unlisted investments; nurturing education finance business
HDFC has long-standing investments in unlisted companies (Table 4) that have generated good
value over time. Also, in a relatively small way, HDFC has entered the education business by
investing Rs230m for a stake of about 62.3% and Rs180m in convertible preference shares in
Credila Financial Services Private Limited, an education-financing NBFC. Given the underlying
macro opportunity (Charts 7, 8 and 9), we believe this business has substantial potential going
forward. However, we have not factored in the value of unlisted investments and HDFC’s stake in
Credila in HDFC’s SOTP valuation, given the relatively small size of Credila’s business currently.
Interest rate cycle looks close to peak: upgrade to Hold with a new Rs651 target price
We believe the Reserve Bank of India (RBI) will conclude the tightening cycle by raising the repo
rate by another 25bp (see RBS economist Sanjay Mathur’s report Qualified hawkishness, 16
June 2011), which is potentially a better environment for non-banking financial companies. We
increase our SOTP-based target price to Rs651 (from Rs558), due to our higher valuation of the
core mortgage business and revaluation of listed associate companies. Our estimates now factor
in the warrant conversion in FY13. At the current price, the core mortgage business trades at 3.9x
FY13F book value (Table 8). Note we have charged off interest on ZCB (actual interest for FY10
and FY11 and estimate for FY12-14) to the income statement
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