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One-off revaluation aids earning; moderation in growth
The operational performance was aided by one-time higher other income from revaluation gain of | 9019 crore from Gruh sale. NII growth was at 10.8% YoY to | 2953 crore. Benefit from lower tax coupled with higher other income aided earnings. The management has utilised partial one-time gain to shore up provision coverage by parking higher credit cost at | 2995 crore. Accordingly, PAT came in at | 8372 crore, lower than estimate due to excess provisioning. Overall spreads remained flat QoQ at 2.27%, with spread in individual portfolio flat at 1.93% & 6 bps to 3.14% in non-individual segment.
Given the unfavourable lending environment, advances growth continue to remain slower at 12.4% YoY to | 431600 crore, led by moderation in corporate book. Though the individual loan portfolio increased ~17% YoY to | 318520 crore and accounted for ~72% of the total loan book, growth in corporate book was curtailed during the quarter at 7% YoY to | 115430 crore (26.1% of book). Growth in the individual loan book, after adding back loans sold in the preceding 12 months, remained healthy at 24% YoY.
Asset quality was stable during the quarter with GNPA ratio up ~3 bps QoQ to 1.36% (GNPA - ~| 5869 crore), led by slippage in non-individual GNPA. Non-performing loans in the non-individual portfolio increased ~4 bps to 2.91%, at a multi-year high. The individual portfolio continued to remain steady at 0.75%. Assets classified into Stage 3 category came in at | 6996 crore vs. | 6685 crore in Q2FY20 and | 6288 crore in Q1FY20.
Moderation in non-individual book; NPA remains steady
Total outstanding advance was | 4.3 lakh crore, comprising individual loans at ~72% of book. Given weakness in real estate sector and cautious approach of lender, pace of non-individual disbursement (construction finance & corporate) is seen staying on slower track ahead. Hence, we model ~13% CAGR in advances in FY19-22E to | 593131 crore. While overall asset quality remained steady with no signs of material deterioration, marginal pressure from non-individual portfolio cannot be ruled out. Therefore, PAT is estimated to grow at ~12% CAGR in FY19-22E to | 13432 crore.
Valuation & Outlook
HDFC Ltd reported fair value gain on stake sale of Gruh Finance. The management decided to deploy partial gain to improve provision coverage ratio. Further, with a prolonged slump within real estate coupled with lower volumes & difficult business situation, HFCs are facing problems of moderation in growth and risk of deterioration in asset quality, especially on developer’s financing. HDFC Ltd, led by superior fundamental, is expected to remain undisputed leader within the pack. However, being a prominent player in real estate, lending will be impacted in terms of slower growth and marginal asset quality pain. Accordingly, we maintain our HOLD rating with a revised target price of | 2650 (earlier | 2200), valuing core HFCs at ~2.5x FY22 ABV & | 1422 for subsidiary post 15% holding company discount.
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