Business Growth Remains Strong; Maintain BUY
Led by robust growth in disbursements, HDFC has reported a strong performance in 1QFY19. Disbursements grew by 24% YoY led by 17% YoY growth in individual segment. This aided the Company to post 18% YoY growth in individual loan AUM and 25% YoY after adding back loans sold in the preceding 12 months. Non-individual loan book grew by 17.3% YoY (+2.1% QoQ) on AUM basis. Post migration to Ind-AS accounting, HDFC’s reported profit surged by 54% YoY to Rs21.9bn on comparable basis led by (a) recognition of Rs5.8bn dividend from HDFC Bank in 1QFY19 vs. similar income booked in 1QFY18; (b) restating 1QFY18 profit downwards under IndAS; (c) 21.7% YoY growth in NII; (d) strong growth in loan assets; and (e) stable spread of 2.28%.
Management Commentary & Guidance
* Post migration to Ind-AS accounting, part of deferred tax liability created will be added back to HDFC’s net worth. Further, premium on redemption of debentures will be passed through P&L vs. earlier practice of adjusting them from share premium A/C.
* Reclassifying its loan book under Ind-AS, the Company has moved to provisioning on Expected Credit Loss (ECL) model from earlier regulatory incurred losses model. Hence, from now onwards, the provisioning will be made based on the Company’s historical loss experience along with various macro-economic parameters.
* The Company has identified 2.5% of loan under standard stressed category, which are classified under “Stage 3(a)”. Though these loans have some degree of stress, they are not part of NPA. Its reported NPA remained stable at 1.18% compared to 1.11% in 4QFY18 and 1.12% in 1QFY18. Overall, HDFC has PCR of 28% on all “Stage 3(a)” loans (including standard stressed loans and NPA).
* HDFC expects marginal rise in cost of funds due to rising interest rate. However, spread is expected to maintain at current level, as it has passed on increased rate to its borrowers.
* The Company has sold 4.1% stake in HDFC AMC and sale proceeds of Rs9.5bn will be booked in 2QFY19 post adjusting for expenses and capital gains tax.
Outlook & Valuation
Visible signs of pick-up in demand for mortgage loans led by improving affordability, attractive incentive from PMAY scheme and introduction of RERA augur well for sustained growth in HDFC’s loan book over next 3-5 years. Further, the performance of its various financial business subsidiaries/associates has improved substantially over the last few quarters. HDFC has raised fresh equity capital to create buffer for leveraging other organic and inorganic growth opportunities in domestic real estate and housing sector apart from investing in HDFC Bank. We maintain our BUY recommendation on the stock with an SOTP-based unrevised Target Price of Rs2,372.
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