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Annual report analysis – consolidating leadership position

HDFC Ltd’s FY21 annual report is themed around ‘finding calm in the chaos’, reflected in its improving market positioning, with capital buffer and efficiency, funding cost benefit and contained stress (stage-2/3 pool at 8.7%) even during challenging times. Few specific insights gauged from annual report include: 1) customer profile for incremental disbursements – 78% salaried, 55% first-purchase homes, 8% rural housing; 2) pre-payments on LRD of 7% and retail loans of 10%; 3) slippage run-rate at mere 1.2% thereby, capping stage-3 assets at 2.3%; 4) on stress pool (stage-2/3) of 24%/3% in non-individual/individual segments, HDFC is carrying provisions of 8.16%/0.65%; and 5) regulatory clarity sought to minimise potential conflicts on few regulations. Maintain BUY with an SoTP-based target price of Rs3,307. Key monitorables will be: Behaviour of 24% non-individual stress pool and rising competition in retail segment. Read on for details.

Annual report throws more insights on individual loan customer profile:

1) 78% disbursements were towards salaried customers and 22% self-employed (including professionals);

2) 55% of loans disbursed to first-purchase homes directly from the builder and 37% for resale;

3) rural housing loans constitute 9% of disbursements;

4) 16% to EWS/LIG customers; and

5) average ticket size up 10% (to Rs2.95mn) as demand was from higher-end properties as well along with affordable housing.

Pre-payment in LRD weigh on non-individual AUM growth; retail pre-payments stable:

Development of REITs market led to large pre-payments in lease rental discounting book. FY21 witnessed ~Rs90bn of repayments equivalent to almost 7% of non-individual AUM. Prepayments on retail loans stood at 10.3% (10.9% in FY20) - 64% of these prepayments were full prepayments.

Slippages at mere 1.2%; stress adequately covered:

The company has reported slippages of 1.2% in FY21 and stage-3 assets settled at 2.3%. Almost 19% of nonindividual loans are in stage-2 constituting more than 75% of overall stage-2 pool. Stage2 in the individual book is less than 2%. The company has been proactive in downgrading loans to stage-2 wherever it sees even the slightest degree of stress or has sought OTR or ECLGS benefit. We expect restructuring to be relatively higher during the second wave as it is not co-existing with moratorium benefit. Also, what needs to be keenly watch out is forward flow from stage-1 to stage-2 and stage-2 to stage-3 amidst some disruption in collections/recoveries.

Regulatory clarity sought to minimise potential conflicts on few regulations:

1) Recommends excluding surplus liquidity from assets to arrive at a prescribed minimum threshold limit of assets in housing finance;

2) considering insurance loan to home loan customer as housing loan; and

3) addressing balance transfer issue for retention of customers as it does not increase home loans or home ownership at a system level.

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