HDFC - MOTILAL - MGT MEET

Impeccable asset quality, growth and profitability performance has led to market cap CAGR of 30%. Motilal Oswal met Mr Keki Mistry, Vice Chairman and CEO of HDFC for a Q&A session. Discussion was largely centered around the outlook for the housing finance industry, and the way forward for HDFC as a financial conglomerate, besides a standalone housing finance entity

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Key takeaways:
- Despite strong growth in the last few years, the Indian housing finance industry remains fairly underpenetrated. This coupled with changing demographics offers strong growth potential for housing finance companies. HDFC is confident of achieving 18-20% asset growth over the next 5-10 years.

- Subsidiaries /associates have grown sizable and have become self-sufficient. The life insurance business has turned profitable and should not need further capital infusion. HDFC does not need to dilute capital to fund subsidiaries; strong core RoE will help fund own growth. Value unlocking through listing of insurance subsidiary could provide capital for infusion in HDFC Bank, as and when needed.

- HDFC largely maintains its guidance on its four core parameters - (1) consolidated RoE to improve by 100bp (except for FY13, due to warrant conversion) every year for the next three years, (2) growth to be maintained at 18 20%, (3) spreads to be in the 2.15-2.35% range, and (4) cost-to-income ratio may not improve in FY13 due to acquisition of new office building and change in taxation-related provisions on certain services.

Recommendation: Motilal Oswal believes that the valuations are attractive, considering the growth potential (FY12-14E earnings CAGR of ~20%), sound business fundamentals, and substantially improved performance of subsidiaries. Buy with an SOTP-based TP of Rs800 (17% upside).

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