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Annual report analysis – Actionable intelligence; opportune time to fructify merger

HDFC Ltd’s FY22 annual report is themed around ‘actionable intelligence’, adapting to a new ecosystem, moving with the times, staying relevant and competitive, coinnovating and being future-ready. Management estimates home loan market would double to US$600bn within the next five years (mortgage penetration at 13% of GDP). The optimum path to scale up housing finance is to be housed within a banking structure. Also, this is an opportune time to fructify the merger with HDFC Bank given a series of favourable regulatory developments (including progressive reduction in CRR/SLR, low interest rate environment, PSL certificates, etc). It is awaiting regulatory guidance going forward. Undoubtedly, there are structural synergies and both the franchises are well equipped to drive it in the best possible way in medium to long term. Nonetheless, it comes with some cost in the interim and requires regulatory approvals on various aspects. Maintain BUY with SoTP-based target price of Rs3,205

* Annual report throws more insights on customer profile: 1) Nearly 78% disbursements were towards salaried customers and 22% towards self-employed (including professionals); 2) 55% of loans were disbursed to first-purchase homes directly from the builder and 37% for resale; 3) rural housing loans constitute 8% of disbursements; 4) average ticket size of individual loans was up >11% to Rs3.3mn reflective of consistently proportion of lending to high income groups (45% in value terms vs 40%/36% in FY21/FY20).

* It witnessed market share gain in retail with individual loan disbursements growing 37% in FY22 and individual AUM up 17%. Non-individual segment growth nonetheless relatively lagged and growth in overall AUM was 15% YoY.

* Retail pre-payments stable: Unlike other financiers, for HDFC, pre-payments on retail loans were stable at 10.3%; 63% of these pre-payments were full pre-payments.

* Nearly 25% of assigned loans qualified for PSL; 2% upfront gain on assigned loans: In FY22, the company assigned Rs285bn worth of loans to HDFC Bank. It has also assigned Rs15bn of standard, non-individual loans. It booked de-recognition gain equivalent to ~3.7% with upfront income at 2% of assigned pool.

* Slippages at 1.1%, stress adequately covered: With slippages at 1.1%, stage-3 assets were stable at 2.3% and stage-2 moderated to 4.4% (6.3% in FY21). Collection efficiency for individual loans on a cumulative basis in Q4FY22 improved to 99.5%. Credit cost was ~33bps (ECL charge of Rs19bn) and it has written-off Rs16.3bn in FY22 (compared to Rs13.7bn/Rs10bn in FY21/FY20).

* Dividend income at Rs15.1bn once again constituted 8% of operating profit similar to FY17-FY19 (compared to 4% in FY20/FY21) post lifting of regulatory restrictions.

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