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Positive outlook over long-term

Housing Development Finance Corporation Limited provides housing finance to individuals and corporates in India. HDFC also provides construction finance to real estate developers and provides lease financing.

* Net Interest Income grew 14.1% YoY to Rs. 4,110cr; NIM improved to 3.6% (+40bps YoY).

* PAT up 31.7% YoY as spread on loans improved this quarter. Cost to income ratio at 8.2% vs 8.4% in the last quarter.

* Strong revival in collections and disbursement seen in the first half of the year. The outlook over long-term remains positive on the back of well-diversified loan portfolio and adequate liquidity on hand. Hence we remain positive on the stock and reiterate our rating to BUY with revised target price of Rs. 3,355 using SOTP Valuation.

Interest spreads remains stable

Interest income marginally slipped 2.9% YoY to Rs. 10.683cr as returns on loans reduced to 8.1% (vs. 9.0% at the end of FY21) at the end of Q2FY22. Interest expense was down 11.2% YoY to Rs. 6,573cr as cost of borrowings reduced to 5.81% (vs. 6.7% at the end of FY21). As a result the spread on loans for the quarter stood at 2.29% leading to net interest income at Rs. 4,110cr (+14.1% YoY) while NIM increased 40bps YoY to 3.6%. Pre-provisioning grew 29.1% YoY to Rs. 5,123cr as the company made a loan loss provision of Rs. 452cr this quarter (+3.7% YoY). The quarter ended with PAT of Rs. 3,781cr (+31.7% YoY).

Sharp recovery in disbursements

Loan book was at Rs. 507,645cr (+9.6% YoY) as loan book on AUM basis grew by 10.6% YoY to Rs. 579,339cr as the individual loan book grows 16% YoY. Cost to income ratio reduced to 8.2% (vs. 8.4% in Q1FY22) as a result of continued decline in nondiscretionary spends. It is to be noted that individual approvals and disbursements grew by 67% and 80% respectively in H1FY22 as compared to the first six months of the previous year. Gross Non-Performing Loans (GNPL) improved 24bps YoY to 2.0% with Individual NPL at 1.10% and non-individual at 4.69%. Ratio of expected credit loss to exposure at default improved to 2.62% (vs 2.60% in 2QFY21). The company remained well capitalized with capital adequacy at 22.4% (vs. 22.2% in Q1FY22).

Key Highlights

* As at September 30, 2021, loans restructured under the RBI’s resolutions framework (OTR 1 & 2.0) was at 1.4% of the loan book (vs. 1.9% of the loan book in Q1FY22). 35% of the restructured loans is in respect to a single account only.

* Loans disbursed under the Emergency Credit Line Guarantee Scheme stood at Rs. 1,738xr. Cumulative COVID-19 provisions at Rs. 1,304cr at the end of Q2FY22.

Valuation

The quarter saw a sharp recovery from 2nd wave of COVID 19 in terms of collections and disbursements in the individual segments. Asset quality remains strong in both the individual and non-individual segments due to excellent recoveries. We expect the margins to remain stable as not much changes in the base rate is expected in the near future. Maintaining these spread levels will be the focus for the company. We remain positive on the stock and reiterate our BUY rating with revised target price of Rs. 3,355 using SOTP Valuation.

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