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HDFC has consistently delivered superior profitability and growth across the economic
cycles. This ability to steer the business through volatile times makes it a relative safe haven,
in our view. Assuming conversion of warrants in FY13, valuations look reasonable. We
upgrade to Buy.
Look beyond FY12; FY13 looks attractive on valuations, in our view
HDFC Limited issued 10.95m warrants in August 2009 at an issue price of Rs55 per share
(Rs275 pre split). Warrant holders can exchange each warrant for one equity share at any
time up to 23 August 2012 at an exercise price of Rs600 per equity share (Rs3,000 pre split).
Assuming warrant conversion in FY13, HDFC Limited’s core mortgage business trades at
4.0x FY13F book value (see Table 1). According to the company, the maximum dilution if all
warrants are exchanged for equity shares is 3.5% of the expanded equity share capital.
Historical track record across economic cycles provides comfort
HDFC Limited’s historical ability to maintain spreads at around 2.2-2.3% and grow business
at over 20% yoy across economic cycles gives us comfort (see Charts 2 and 4). In addition,
its asset quality has consistently remained superior to that of peers (see Chart 3). As of
March 2011, gross NPLs (90 days overdue) were 0.77% of loans (0.83% as of June 2011)
and were adequately provided for. For individual loans, the NPL ratio was 0.72% as of
March; for the non-individual portfolio, it was 0.84%. From its inception to March 2011, HDFC
Limited’s loan write-offs (net of subsequent recoveries) totalled 4bp (Rs1.1bn) of cumulative
disbursements. The average loan to value ratio (at origination) was 68%.
Stability in times of uncertainty; upgrade to Buy
Since the withdrawal of the teaser rate loan scheme, India’s mortgage financing market appears
to have become less competitive in terms of interest rates. Also, given recent global
developments, we think the RBI is unlikely to be aggressive on rate hikes. We believe the
combination of a less competitive market and a likely peak in the interest rate cycle bodes well for
HDFC. We keep our earnings estimates unchanged and mark-to-market valuations for listed
investments in associates and group companies. We increase our terminal ROE assumption to
19.5% (from 18%) given HDFC’s ability to maintain superior profitability across economic cycles
(Chart 1) and to reflect the relative safety in the current macro environment. This raises our
valuation of the core business and our SOTP-based target price to Rs759, which implies 4.6x
FY13F book value. We upgrade our recommendation to Buy from Hold.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC has consistently delivered superior profitability and growth across the economic
cycles. This ability to steer the business through volatile times makes it a relative safe haven,
in our view. Assuming conversion of warrants in FY13, valuations look reasonable. We
upgrade to Buy.
Look beyond FY12; FY13 looks attractive on valuations, in our view
HDFC Limited issued 10.95m warrants in August 2009 at an issue price of Rs55 per share
(Rs275 pre split). Warrant holders can exchange each warrant for one equity share at any
time up to 23 August 2012 at an exercise price of Rs600 per equity share (Rs3,000 pre split).
Assuming warrant conversion in FY13, HDFC Limited’s core mortgage business trades at
4.0x FY13F book value (see Table 1). According to the company, the maximum dilution if all
warrants are exchanged for equity shares is 3.5% of the expanded equity share capital.
Historical track record across economic cycles provides comfort
HDFC Limited’s historical ability to maintain spreads at around 2.2-2.3% and grow business
at over 20% yoy across economic cycles gives us comfort (see Charts 2 and 4). In addition,
its asset quality has consistently remained superior to that of peers (see Chart 3). As of
March 2011, gross NPLs (90 days overdue) were 0.77% of loans (0.83% as of June 2011)
and were adequately provided for. For individual loans, the NPL ratio was 0.72% as of
March; for the non-individual portfolio, it was 0.84%. From its inception to March 2011, HDFC
Limited’s loan write-offs (net of subsequent recoveries) totalled 4bp (Rs1.1bn) of cumulative
disbursements. The average loan to value ratio (at origination) was 68%.
Stability in times of uncertainty; upgrade to Buy
Since the withdrawal of the teaser rate loan scheme, India’s mortgage financing market appears
to have become less competitive in terms of interest rates. Also, given recent global
developments, we think the RBI is unlikely to be aggressive on rate hikes. We believe the
combination of a less competitive market and a likely peak in the interest rate cycle bodes well for
HDFC. We keep our earnings estimates unchanged and mark-to-market valuations for listed
investments in associates and group companies. We increase our terminal ROE assumption to
19.5% (from 18%) given HDFC’s ability to maintain superior profitability across economic cycles
(Chart 1) and to reflect the relative safety in the current macro environment. This raises our
valuation of the core business and our SOTP-based target price to Rs759, which implies 4.6x
FY13F book value. We upgrade our recommendation to Buy from Hold.
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