HDFC Ltd's Q1FY20 results (Outperformer) - Miss on PAT, but still strong in a weak macro

Q1FY20 result highlights

• HDFC’s PAT of Rs32bn grew 46% yoy and 12% qoq and was below our estimate of Rs36bn. An increase in cost of funds and, slowdown in developer loans given weakness in the real estate segment, led to slower than expected revenue. AUM growth slowed to 13% yoy (from 15% in 4Q) driven by a sharp slowdown in non-individual loans. Gains from stake sale in GRUH of 18.9bn were partly used to make contingency provisions of Rs5.7bn. GNPAs rose sharply by12% qoq as Jet Airways of Rs4.2bn slipped. Asset quality of individual loans was stable. Core PPOP growth slowed to 12%.
• AUM growth slowed to 13% yoy and 3% qoq. While individual AUMs grew strongly at 17% yoy / 3% qoq there was a sharp slowdown in non-retail AUMs where growth moderated to 2% yoy.  HDFC assigned loans of Rs72bn in 1QFY20 versus Rs97bnyoy.  Total loans assigned / sold down grew 25% yoy. Affordable housing with average ticket size of Rs1.02M, accounts for 17% of individual approvals.
• Ex-assignment income (assignment income is booked upfront in INDAS), NII growth moderated to 5% yoy (declined 5% qoq). There was a sharp increase in assignment income which grew 109% yoy and 348% qoq. NII including assignment income grew 11% yoy and 4% qoq.
• Reported spread declined 5 bps qoq to 2.25%.  Calculated spread including loans assigned declined 10bps yoy and 13bps qoq. Ex-assignment, calculated spread declined more sharply by 20bps yoy and 34bps qoq. The decline in spread was driven by increase in cost of funds by 40bps qoq as the proportion of bank borrowings increased. Calculated yield on assets rose marginally qoq despite slower growth in non-retail loans because lending to the affordable segment likely served as an offset.
• Excluding dividends/capital gains/income from surplus funds/ fair value gains on investments, core PPOP growth slowed to 12% yoy in 1Q compared to 28% in 4Q.
• Gross stage 3 loans rose 8% qoq as Jet (Rs4.2bn) was classified as NPL. While retail NPLs remained stable at 0.72% of loans, there was a sharp increase in non-individual NPLs that grew 34bps qoq to 2.68%. The expected credit loss as % of exposure at default is at 1.6% versus 1.4% qoq.

Valuation and view

Given the severe liquidity crunch in the HFC segment, we believe only a few strong players will survive and HDFC leads that pack. We maintain OP driven by HDFC’s strong liquidity position and stable performance. Developer loans remain a key monitorable.  We retain our TP of Rs2,300. Our earnings for FY20E remain unchanged as higher provisions and slower growth are offset by higher trading gains. We cut earnings for FY21E by 7% as we build in higher provisions and lower AUM growth by 1% to 16%.