HDFC Ltd's Q1FY19 results (Outperformer) - Strong loan growth

Q1FY19 result highlights

• HDFC’s PAT of Rs21.9bn was in line with our estimate of Rs22bn. Loans grew 19% yoy /4% qoq while AUM growth was also strong at 18%. The company transitioned to IndAS in 1Q (April 1, 2017 is the effective date.) The P/L has been restated for 1Q18 (not for 4Q). The impact of the transition on net worth has not been disclosed but it will likely be positive at ~Rs25bn. Net profit under IND AS is 8% lower than IGAAP for 1Q18. NII is also 8% lower driven by charging interest on zero coupon bonds through P/L versus direct debit to net worth under IGAAP.
• Individual disbursals grew 17% yoy which is healthy given that last year’s base was high driven by the preponement of purchases before GST. NII under Ind AS grew 25% yoy and declined 11% compared to IGAAP NII of 4Q18. While reported spread is flat yoy, calculated spread is up 5 bps yoy. HDFC’s spread started improving over 2Q18-4Q18 driven by lower cost of funds. While we do not have recast figures for 4Q18, we estimate that sequentially like to like spreads are down at least 20 bps driven by higher cost of funds.
• Fees declined 16% yoy due to amortization under Ind AS.
• Operating expenses grew sharply at 46% yoy due to ESOP cost of Rs1.95bn versus 0.95bn yoy and CSR cost of Rs1bn.
• Excluding dividends/capital gains/income from surplus funds, core operating profit grew 15% yoy higher than 8% yoy in 4Q18.
• GNPAs for 1Q18 are 10% lower under IndAS compared to IGAAP. In 1Q19, GNPAs are up sequentially (though not strictly comparable). The qoq increase is on account of a Mumbai based developer loan of ~Rs2bn which will likely be recovered in FY19 itself.
• Credit cost for 1Q19 has declined to a low Rs197M from Rs1.6bn yoy (1Q18 had a lumpy credit cost for Essar Steel). Under ECL, the LGD for retail is 8% while for wholesale  it is 21%. With property as collateral retail LGD will continue to be low.

Valuation and view: We maintain OP driven by strong disbursement growth and above average performance of subsidiaries. We revise TP to Rs 2285 on higher subsidiary valuation and increase in opening net worth by Rs15 per share. Impact of rising rates on spreads is a key monitorable. We will recast earnings as we get more balance sheet details.