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Key Highlights of Q3FY22 Results

* On November’21, RBI issued guidelines for harmonizing NPAs across the financial system. As a result, Gross NPA increased to 2.32% in 3QFY22 as compared to 2.00% in the last quarter with NPA of individual loans (1.44%) as well nonindividual loans (5.04%). Adjusting the NPA accounts, which are less than 90 days outstanding, Gross NPA would have been lower by 51 bps. Annualized credit cost for Q3 was lower at 29 basis points compared to 55 basis points and 35 basis points in Q1 and Q2 respectively. As per regulatory norms, based solely on the period of default, the corporation is required to carry a total provision of Rs.7,450 cr as of Q3FY22, while the actual provision carried is Rs.13,195 cr. The Reserve Bank of India had permitted a one-time restructuring of loans under the resolution for COVID-19 related stress. The company has restructured loans to the tune of 1.34% of the loan book. Out of total loans restructured, 64% are individual loans, and 36% are non-individual and as much as 34% is in respect of just one non-individual account. HDFC Ltd has recovered Rs.683 cr in January’22 and post the recovery, the restructured book is 1.21% of the loan book. The collection efficiency ofthe company is healthy at 98.9% in the current quarter.

* Loan book grew by 11% yoy to Rs.5,38,994 cr, with individual advances (79% of the total book) growing by 11.4% yoy. Individual loan disbursements in 3QFY22 were 15% higher than 3QFY21. As of January 31, 2022 approvals and disbursements are both at 105% of the FY21 levels. For the current quarter, the average loan was Rs.32.3 lakhs as compared to Rs.28.5 lakhs in 3QFY21. This is an account of an increase in high-income group customers (Annual Income-Rs.18 lakhs) from 40% of the total in 9MFY21 to 44% in 9MFY22. The company expects the non-individual book to report yoy growth in FY22, with construction finance to pick up pace.

* On the P&L front, Net interest income growth was subdued at 2.8% yoy, as the company carried excess liquidity on its books. It intends to bring the high-quality liquid assets by Rs.11,000 cr, thereby r educing the exc ess liquidity. In January’22, the corporation has increased the yields on nonindividual loans, which should increase the spreads for the company. Income earned from the deployment of surplus funds in cash management schemes or mutual funds was lower at Rs.102 cr as compared to Rs.127 cr in the corresponding period of the previous year. This was due to a sharp drop in short-term rates, where it earned 3.1% on the surplus liquidity as compared to 3.7% in the previous year. Operating profit grew by 2.2% yoy to Rs.4,440 cr, while the lower cost of credit resulted in 11% yoy increase in PAT.

OUTLOOK AND VALUATION

We believe that, HDFC experienced management, strong underwriting practices and improving housing market are the key drivers for the good quality. Stock is trading at 3.4x ABV of FY23. At CMP, HDFC core book trades at 1.4x/1.3x on FY22E/23E core ABV of Rs. 631/703 per share (net of investment in subsidiaries). We recommend ‘BUY’ with a target price of Rs.3,195, with an investment horizon of 18-24 months.

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