HDFC Limited - Consolidating leadership amidst adversity - ICICI Securities

HDFC Ltd's Q2FY21 earnings were characterised by reversion to pre-Covid levels on growth front (especially in retail home loans - disbursements up 11% in September, 35% in October). The benefit of unwinding excess liquidity (by Rs100bn), reduced borrowing (down 3% QoQ), improved risk profile (RWA down 4% QoQ), and the recent equity raise supported 20bps NIM expansion and NII settling at better-than-expected level. Collection efficiency for retail loans at 96.3% (morat pool collections at <85% - key to watch out for), asset classification benefit being extended to 1.7% of advances, expectation of improved recovery and provisioning buffer of 2.7% (of advances), suggest adequacy of provisioning. Overall, earnings beat expectations on operational front. We maintain our stance on credit cost, liquidity, capital buffer and superior profile to support earnings and help consolidate HDFC's positioning amidst adversity. Maintain BUY with a SoTP-based target price of Rs2,423.

- BAU to a large extent, will pick up pace soon: Business is not only reverting to pre-Covid level (retail disbursements 95% of Q2FY20), but entering the growth phase too (September month retail disbursements were up 11% and in October, up 35%). Individual loans (excluding sell-downs) grew 10% YoY/3% QoQ. On non-retail side, HDFC is focused on lending to select 'AAA' rated corporates. In the quarter, higher repayment run-rate (of >Rs50bn) led to run-down in non-retail book - though partially offset by interest capitalisation component. We are building-in loan growth of 9% (11% for retail loans) by FY21-end and 14% (16% retail) for FY22.

- Collection efficiency at 96.3%; 9 bps rise in non-individual GNPLs: Overall collection efficiency for individual loans in September was 96.3% - with non-moratorium customers collection efficiency at 99.5%. However, given morat 2.0 pool at 16%, it suggests collections in moratorium pool at <85%. Recovery from this non-collected portion will be key to watch out for. Pro forma GNPLs would have been higher by merely 2 bps at 1.83% of the loan portfolio; with individual NPLs at 0.88% (down from 0.92% in Q1FY21) and non- individuals NPLs at 4.19% (compared to 4.1% in Q1FY20). Asset classification benefits have been extended to loans worth Rs80bn (1.7% of the loan book).

- Adequate provisioning buffer to cushion earnings volatility: HDFC has been utilising 30% of any windfall gains in building a contingency buffer. This quarter, too, it created some provisioning of Rs4.4bn (30bps annualised - against our expectations of more than 1%). Outstanding provisions still remain flat QoQ at Rs123bn - 2.6% of gross assets - suggesting similar quantum of write-offs. With this buffer, incremental provisioning requirement will be capped at 1.2%/0.8% over FY21E/FY22E, respectively.

- NIMs, after dragging due to excess liquidity, improved 20bps QoQ: Net interest income grew 21% YoY - ahead of expectation as NIMs improved 20bps to 3.3%. Unwinding of high liquidity buffer (down ~Rs100bn to Rs225bn), reduced borrowings (down 3% QoQ), coupled with the recent equity raise supported NIM expansion. The efforts are to minimize negative carry, will support NIMs at 3.1% for FY21E.

- Absence of dividend income makes earnings look optically lower YoY: As was disclosed during business update, dividend income was merely Rs3.23 (Rs27bn in Q2FY20), further buoyed by gain in fair value adjustments of Rs1.66bn and net gains on loans assigned of Rs1.6bn (Rs2.6bn). However, this was offset by charge for employee stock options of Rs460mn (merely for a month; next quarter will be more than Rs1bn). Adjusting for all this, earnings would have grown over 25% YoY.

Shares of HOUSING DEVELOPMENT FINANCE CORP.LTD. was last trading in BSE at Rs.2042.65 as compared to the previous close of Rs. 1922.75. The total number of shares traded during the day was 223532 in over 14274 trades.

The stock hit an intraday high of Rs. 2065 and intraday low of 1921. The net turnover during the day was Rs. 444150219.

Source : Equity Bulls

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