HDFC Ltd's Q4FY18 results (Outperformer) - Core PPOP growth moderates to 8% yoy

Q4FY18 results highlights

• HDFC’s PAT of Rs28bn wash higher than our estimate of Rs26bn due to a lower tax rate. PAT grew 39% yoy but declined 50% qoq (3Q18 had exceptional capital gains from HDFC Standardn Life)
• Retail disbursals grew strongly at 34% yoy partly driven by the low base effect of demonetization and pick up in mass housing demand. Corporate disbursals grew in the mid-teens. Retail AUMs grew strongly at 18% yoy and 5% qoq. Non-retail AUMs grew 17% yoy. Total AUMs grew 18% yoy and 4% qoq. While mid-sized and affordable housing segments are seeing an uptick in demand, the luxury segment is still suffering.
• Reported and calculated spread remained flat qoq despite 4Q being a seasonally strong quarter for recoveries. Bond yields rose in 4Q which explains why spreads remained flat.  NII from housing grew 15% yoy and 10% qoq. Other interest income declined 20% yoy.  Overall NII including other interest grew 11% yoy and 8% qoq.
• Fees declined 53% yoy due to slower yoy corporate disbursals. Gross NPLs rose 2% qoq.
• The tax rate came in at 19% versus 12.6% qoq and 34% yoy. The huge capital gain during 3Q triggered the Minimum Alternate Tax which led to a decline in taxation in 2HFY18.
• Excluding dividends/capital gains/income from surplus funds, core operating profit grew 8% yoy and 9% qoq, slower than 11% yoy in 3Q18 and 15% yoy in 1HFY18.
• Tier I improved to 17.3% from 14.5% qoq following the recent capital raise.
• With higher capitalization, RoE for FY19 will fall to 15.5% versus an average RoE of 22% over FY15-FY18E. PAT for FY19 will decline 17% yoy as there were exceptional capital gains from the listing of HDFC Standard Life in FY18. We expect PAT to grow 16% yoy in FY20E yielding a RoE of 16%. 

Valuation and view

We reiterate Outperformer driven by revival in disbursement growth and above average performance of subsidiaries. Our TP remains unchanged at Rs 2,180. We value the core business at 2.4x PBV FY20E yielding Rs984. We value the subsidiaries at Rs1,193 per share.