HDFC - Stable business growth - Phillip Capital

We met the management of HDFC Ltd. Following are the key takeaways:

Retail segment continues to drive growth: Retail advances have been the major growth driver for HDFC in the last 4-5 quarters given a) ongoing slowdown in the developer and lease rental segment and b) conscious decision by the management to limit disbursements in the developer segment. In the retail segment, HDFC Ltd has witnessed strong growth in NCR and Chennai. Going forward, the management does not expect the situation to change much and foresees a continued slowdown in the non-retail book with retail continuing to be the growth driver.

NIMs to improve on account of realization of overdue interest from a developer NPA account and securitization at higher yields: NIMs are likely to improve in Q4FY14 as HDFC Ltd has realized overdue interest on repayment of non-performing Hiranandani Chennai project and owing to securitization at higher yields. Given the increasing demand for PSL requirement from other banks, HDFC Ltd has sold loans worth Rs 14 bn to other banks in Q4FY14 (in addition to loans of Rs 55 bn sold to HDFC Bank during FY14). This will take the total loan sell downs by HDFC Ltd in FY14 to Rs 69 bn (Rs 52 bn in FY13). The loans sold to other banks were at a spread of 2.5% as against the spread of 1% earned on loans sold to HDFC Bank. The off book spreads being much higher, along with the capital release benefit from securitization will aid in NIM and RoE improvement.

Asset quality in retail to remain benign; however in developer segment, GNPAs to decline significantly: HDFC's retail asset quality is benign (retail GNPAs at 0.57% as on Dec'13) and is likely to remain stable going forward. In the developer segment, repayment by Hiranandani PLC by buying out its Chennai property which was auctioned recently will bring down developer GNPAs by almost 1/3rd. While there are few other stressed developer loans, given the higher collateral value and personal guarantee of the promoters, the management does not envisage any fresh slippages in its developer book in the near term.

Fee income growth to remain subdued: With moderation in disbursements in the developer segment going forward, the fee income growth is likely to remain subdued. However, there will likely be some uptick in the investment gains and dividend income in Q4FY14.

Outlook and valuation

Driven by stiffer competition in the retail home loan segment and slowdown in the developer segment, we expect HDFC Ltd to witness moderation in loan book growth to ~18% over FY14-16E. Over the last few quarters, the incremental growth has come from retail segment which resulted in decline in spreads. Going forward, we expect spreads and NIMs to improve driven by higher spreads on securitization and flexibility in borrowing mix (HDFC has raised USD 300 mn under affordable housing scheme). Moreover, we remain sanguine about HDFC's asset quality and ability to deliver stable earnings growth of 15%+ with robust RoA of ~2.7%. At the CMP, HDFC trades at 3.75x FY15E Adj BV (net of investment in subsidiaries and associates). Given the recent run up in stock price and limited upside from current levels, we maintain our Neutral rating on the stock with a revised PT of Rs 876.

Source : Equity Bulls

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