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Increase in loan sell-downs
MTM loss on RBL Bank and no dividends to impact 4Q reported earnings
* In line with prior quarters, HDFC has released key data points for 4QFY20.
* The company sold down INR54.8b worth loans to HDFC Bank (HDFCB) during the quarter (up 29% QoQ, 1.3x YoY). Note that under Ind-AS, companies upfront the present value of future spreads earned over the life of the loan at the time of the sell-down. Such income amounted to INR1.7b in 3QFY20 and INR662m in 4QFY19. We have modeled in INR2.2b for the same in 4QFY20 earnings
* HDFC will recognize MTM loss of INR1.8b on its investment in RBL Bank during the quarter. Note that fair value of the investment as on 31st Mar’20 stood at INR1.2b (v/s an initial investment of INR600m).
* The company did not receive any dividend income from subsidiaries or associates in 4QFY20 (v/s INR5.3b YoY). Due to change in taxation laws on dividend, usual dividend income of subsidiaries is likely to be received in 1QFY21. Company accounts for dividend income on receipt basis. There was also no profit or loss on stake sale in any subsidiary during the quarter (v/s INR3.2b YoY).
* We revise our SOTP to reflect current challenges in the mortgage business coupled with revised valuation of subsidiaries. We have earnings by 7-8% to factor in impact of lower growth, pressure on margins and marginal increase in credit cost. We value the mortgage business at 2x FY22 PB (11% AUM CAGR, 13% core RoE). Maintain Buy with a TP of INR2,050 (FY22 SOTP based).
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