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Healthy growth in Individual business

Takeaways from pre-quarterly release

* The strong disbursement growth seen post the festive season sustained throughout the quarter, supported by low interest rates, attractive offers from developers, and reduced stamp duty in key states. While the company did not specify the exact details regarding disbursement growth, it mentioned that the Individual loan business has continued to see strong improvement. In 3QFY21, HDFC reported 26% YoY individual disbursement growth. We have modeled in 3.5% QoQ /11% YoY individual AUM growth for 4QFY21

* After muted loan assignments in 1HFY21, it continues to show healthy traction. HDFC sold down INR75b worth of loans in the quarter v/s INR55b YoY and INR71b in 3QFY21. In 1HFY21, total assignments stood at INR44b. We expect the company to report an upfront assignment income of INR3.6b from the sell-down. Note that in FY21, it sold loans worth INR190b v/s INR240b+ in the prior two fiscals.

* During the quarter, there were no stake sale gains in subsidiary/associate companies. In 3QFY21, HDFC reported INR1.57b gains on a stake sale in HDFC Life Insurance – to bring it down to the mandated regulatory limit of less than 50%.

* The company would incur an ESOP expense of INR1.44b in 4QFY21 (largely in line with estimates).

* Dividend income stood at INR1.1b for 4QFY21. For FY21, the total dividend income is INR7.35b v/s INR10–11b in the previous three financial years. The lower dividend is attributable to the regulatory guidelines for banks and insurance companies to conserve capital.

* HDFC remains one of our preferred picks in the sector. We like HDFC’s ability to gain profitable market share despite significant competitive pressures. Additionally, contrary to initial expectations, the Real Estate market has seen a swift turnaround. With incremental cost of funds from the capital markets at ~5.5%, the company would be able to manage spreads despite the sharp cut in home loan yield. HDFC has built in large provision buffers to help it sustain any spike in NPLs in the coming quarters. We expect the company to deliver core RoE of 12–14% over the medium term.

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