Update On Housing Development Finance Corporation Buy Motilal Oswal
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Loan assignments and dividend income higher YoY/QoQ and charge from the fair value of stock options continued
Takeaways from HDFC’s pre-quarterly release
* HDFC sold down loans worth INR71.3b in 2QFY22 v/s INR30.3b YoY and INR55b QoQ. We expect the company to report an upfront assignment income of INR3.2-3.3b from the sell-down. Note that in the prior fiscal, it sold down ~INR190b worth of loans.
* Profit from the sale of investments was ZERO. In the last quarter, it reported a profit from sale of investments of INR2.63b. This was from a part stake sale in HDFC Ergo General Insurance (INR2.1b) and entire stake sale in its associate Good Host Spaces (INR540m). HDFC’s stake in HDFC Ergo General Insurance declined to 49.98%.
* Under Ind AS guidelines, employee stock options are fairly valued and charged to the P&L under employee expenses over a two year vesting period. The company incurred ESOP expense of INR1.22b in 1QFY22 (largely in line with our estimate and at a slightly lower run-rate than the preceding three quarters).
* Dividend income stood at INR11.7b v/s INR3.2b in 2QFY21, given that it received dividends from its subsidiaries and associates during the quarter.
* HDFC is our preferred pick in the Housing Finance sector. We like HDFC’s ability to gain profitable market share, despite significant competitive pressures. The Real Estate market saw a swift turnaround in 2QFY22.
We expect this sector to remain reasonably buoyant even in the absence of any stamp duty cuts. With incremental cost of funds from the capital markets at 5.5-6%, the company has been able to manage spreads, despite the sharp cut in home loan yields, led by the largest Public Sector Bank in India. HDFC has built a large provision buffer to guard against contingencies in NPLs from COVID-led disruptions. We expect it to deliver a core RoE of 12-13% over the medium term.
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