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‘Solid growth and asset quality execution continues’

Our view

Q2 FY22 was a strong quarter for HDFC Ltd. wherein growth, margin and asset quality management remained impressive notwithstanding its large size, intense competition and volatile external environment. The 4% qoq/16% yoy growth in individual loans was ahead of our expectation as disbursements grew by robust 80% yoy in H1 FY22. Rising disbursements are driven by increasing demand for home loans, strong traction in both affordable and high-end markets, increase in loan ATS (Rs3.3mn, up 6% qoq/22% yoy) and co. gaining market share. Annualized pre-payment rate was near 10% in H1 FY22, below the historical range of 10-12%, additionally indicating that HDFC has not been impacted by the evolving competitive dynamics. Individual loans disbursements in October has been the second highest ever. A structural upturn in housing market would increase visibility over continuation of such growth performance for a longer run.

Besides sustained traction in individual loans, the LRD portfolio witnessed a substantial growth of 50%+ on qoq basis after having contracted consistently in the past four quarters due to prepayments (loans being replaced by REITs). HDFC expects construction finance lending to pickup with some lag but is hopeful of delivering a growth in non-individual segment during FY22 (5% de-growth in H1). Aided by continuous reduction in funding cost (20 bps decline qoq on computed basis), the portfolio spread in individual loans segment was maintained at 1.93%.

The dpd construct of the overall portfolio improved with 30+ dpd correcting by 50 bps to 8.7%. HDFC witnessed significant reduction in Stage-3 individual loans (down 14% qoq) on the back of higher collections/resolutions and in Stage-2 non-individual loans (down 7% qoq) with management upgrading classification of certain loans after their satisfactory behavior. The concomitant provisioning releases were prudently utilized to buffer-up Stage-1 and Stage-3 provisions of individual loans. Credit cost was at annualized 35 bps, and the management expects further normalization over the medium term. OTR portfolio stood at 1.4% of loan book, slight increase from 0.9% as of June. Of the loans restructured, 63% are individual loans and 37% are non-individual loans; and 35% is in respect of just one account. HDFC expects near 50% of this pool to be resolved soon.

We continue to believe that HDFC is well-placed to benefit from a widely expected structural housing market recovery due to robust distribution and execution architecture (being bolstered by origination tie-ups), high-quality portfolio of individual loans, well-provided stress in nonindividual segment and robust capital position. We project core PPOP growth of 13-14% over FY21-24 with stable spreads (competition unlikely to impact in future too). The core mortgage business is available at 2.1x FY24 P/ABV. Maintain BUY and with enhanced 12m PT of Rs3335

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