HDFC Ltd's Q2FY19 results (Outperformer) - Strong loan growth, core NII declines qoq

Q2FY19 result highlights

• HDFC’s PAT of Rs25bn was in line and grew 25% yoy and 13% qoq.
• AUM growth remained strong at 17% yoy and 2% qoq. Individual disbursals grew 17% yoy while individual loans grew 18% yoy. There was a sharp increase in non-individual disbursals but AUM growth was slower at 13% due to repayments.
• Under Ind AS income from loans assigned has to be booked upfront against amortization under IND GAAP. This will add an element of volatility to NII as loans sold to HDBK will vary. Ex assignment income, NII grew 18% yoy but declined 7% qoq. Including loans sold, NII grew 24% yoy and 4% qoq. Income from loans sold down grew sharply qoq by 181%.
• Reported spread stayed stable qoq at 2.28%. Calculated spread including loans sold down remained stable qoq. However, excluding loans sold down, calculated spread has declined sharply because of a sharp rise in interest expenses.  Interest expenses grew 11% qoq due to higher cost of funds and change in borrowing mix in favour of bank loans. Proportion of bank loans rose to 18% from 16% qoq.
• Fees grew sharply by 46% yoy and 75% qoq driven by a sharp growth in non-individual disbursals. Operating expenses declined qoq and yoy as ESOP charges dropped sharply. ESOP charges dropped from Rs1.91bn to Rs86m. Excluding dividends/capital gains/income from surplus funds, core PPOP grew 18% yoy but declined 2% qoq.
• Credit cost rose sharply from Rs0.2bn to Rs4bn qoq. Of the Rs4bn of credit cost, Rs2.7bn was contingency provisions made out of stake sale in HDFC AMC. When HDFC books gains from stake sales, it appropriates 30% of the profit to such provisions. Even excluding these contingency provisions, credit cost has gone up qoq possibly due to movement from stage 1 to stage 2. Gross stage 3 loans declined 2.4% qoq as Essar Steel was sold to Edelweiss. Principal exposure to Essar was Rs9bn and it was sold at a 25% haircut with profit on sale. (HDFC made provisions for Essar last year in 1Q18).

Valuation and view:

We maintain OP driven by strong disbursement growth. Given liquidity crunch in the sector, concerns on developer segment and likelihood of growth slowing, we cut our target multiple and TP. We revise TP to Rs2,020 from Rs2,285 We cut multiple on core business to 2.3x from 2.5x earlier.