HDFC (Q3 FY11)

CMP Rs642, Target price Rs752, Upside 17.1 %

• Loan book grew 21% yoy (3% qoq); incremental lending primarily towards individual loans
• Sanctions and disbursements remain at >25% yoy levels
• Net profit was up 33% yoy (10% qoq); C/Income ratio remains  under check  
• Spreads remain intact at 2.2% levels; provisioning in excess of regulatory requirement
• Rate as BUY; attractive valuation with immense growth including value unlocking.   

Result table

(Rs mn)	Q3 FY11	Q2FY11	% qoq	Q3 FY10	% yoy
Total Int. Inc	30,205	27,371	10.4	25,586	18.1
Interest exp.	(19,928)	(17,176)	16.0	(17,042)	16.9
Net Interest Inc	10,277	10,195	0.8	8,544	20.3
Other income	3,006	2,332	28.9	2,036	47.6
Total Income	13,282	12,527	6.0	10,580	25.5
Operating exp.	(1,003)	(1,041)	(3.7)	(847)	18.4
Provisions	(150)	(150)	-	(160)	(6.3)
PBT	12,129	11,335	7.0	9,573	26.7
Tax	(3,220)	(3,260)	(1.2)	(2,860)	12.6
Reported PAT	8,909	8,075	10.3	6,713	32.7
EPS	6.1	5.5	10.0	4.7	29.5

Source: Company, India Infoline Research

Key Ratios (%)	Q3 FY11	Q2FY11	% qoq (bps)	Q3 FY10	% yoy (bps)
Spreads	2.2	2.3	(0.2)	2.3	(0.1 )
Cost / Income	7.6	8.3	(0.8)	8.0	(0.5)
BV (Rs)	121.6	117.7	4.0	107.6	14.0
RoE	21.5	20.3	1.2	18.6	2.9
CAR	14.1	14.1	-	14.8	(0.7)
Tier I	13.0	13.0	-	13.3
GNPL (90-days)	0.85	0.86	(0.0)	0.94	(0.1)
GNPL (180-days)	0.54	0.53	0.0	0.60	(0.1)

(Rs mn)	Q3 FY11	Q2FY11	% qoq	Q3 FY10	% yoy
Loan book	1,090,512	1,062,875	2.6	904,100	20.6
Individuals	817,807	682,635	19.8	657,933	24.3
Corporate	373,318	365,226	2.2	315,863	18.2
Others	15,701	15,014	4.6	15,489	1.4
Borrowings	1,078,184	1,091,750	(1.2)	891,836	20.9
Term loans	375,191	350,043	7.2	270,540	38.7
Bonds, deb, FCCB & CPs	443,906	472,897	(6.1)	401,508	10.6
Deposits	259,087	268,810	(3.6)	219,787	17.9

Source: Company, India Infoline Research

Loan book grew 21% yoy (3% qoq); incremental lending primarily towards individual loans
HDFC reported sturdy 21% yoy and 3% qoq growth in its loan book during Q3FY11. Rising real estate prices, improving income levels, benign interest rate regime in initial period of the year, and healthy sanctions pipeline resulted in >11% growth in loan book YTD (vs. 6.1% during 9mFY10).  A significant part of growth in loan book was led by individual loans. Lower LTV (~67%) and average loan size at Rs1.5-1.6mn; share of individual loans continue to remain at >65% of the total loan portfolio. With >25% growth in sanctions and disbursements, we expect HDFC to clock 23% CAGR in loan book over FY10-12E.

Net profit was up 33% yoy (10% qoq); C/Income ratio remains under check
HDFC Q3FY11 net profit grew 33% yoy (10% qoq) on back of healthy 21% yoy growth in loan book. Loan sanctions/disbursements continue to witness steady >25% yoy growth. Excluding gains of Rs1.6bn on sale of investments in IL&FS, net profit grew 11% yoy. Further, in-house loan sourcing model has enabled the company to maintain adequate check on its cost. C/Income ratio has remained in single digits for past 6 quarters. 

Spreads remain intact at 2.2% levels; provisioning in excess of regulatory requirement
While the rising interest rate scenario is expected to impact HDFC’s borrowing cost, we believe, this would be offset by 75bps increase in PLR effective since December. Superior credit rating and access to retail deposits has enabled HDFC maintain its spreads at ~2.2% range for past several quarters. Borrowings during the quarter grew 21% yoy (down 1% sequentially); term loans constituted 35%.

With a view to cap excessive leverage to housing finance sector, NHB, had issued guidelines pertaining to 1) provisioning requirement towards corporate/ builder/agencies for housing and other purpose, loan against property 2) LTV and 3) risk weights for exposure by housing finance companies. Accordingly, HDFC was required to create a provision of Rs4.3bn on teaser loan scheme. The cumulative provision coverage ratio stood at 0.9% (0.68% in H1FY11) including excess provision to the tune of Rs2.7bn. Asset quality continues too remains comfortable. (GNPL - 90-days @0.85%, 180-days @0.54%) 

BUY; attractive valuation with immense growth including value unlocking
We expect valuations to re-rate significantly from current levels given a) immense potential in mortgage business, b) stable spreads, c) best-in-class returns ratio, d) minimal concerns on asset quality and e) value unlocking in subsidiary. Rate as BUY with a target price of Rs752. HDFC has reportedly been planning an IPO for its life insurance business. While uncertainties over listing guidelines prevail, we believe that the process would complete by end-FY12.

Financial summary 

Y/e 31 Mar (Rs m)	FY10	FY11E	FY12E	FY13E
Total operating income	42,978	51,840	62,969	75,432
yoy growth (%)	19.9	20.6	21.5	19.8
Oper. profit (pre-prov.)	39,740	47,820	57,974	69,222
Net profit	28,265	33,929	41,024	48,814
yoy growth (%)	23.8	20.0	20.9	19.0
EPS (Rs)	19.7	23.6	28.6	34.0
BVPS (Rs)	105.9	120.1	139.4	164.0
P/E (x)	32.6	27.2	22.5	18.9
P/BV (x)	6.1	5.3	4.6	3.9
ROE (%)	20.0	20.9	22.0	22.4
CAR (%)	14.6	15.0	13.4	12.7
Tier I (%)	12.7	13.1	12.0	11.6

Source: Company, India Infoline Research