HDFC Ltd's Q2FY20 results (Outperformer) - In line with expectation

Q2FY20 result highlights

• HDFC’s PAT of Rs40bn grew 61% yoy and 24% qoq. There were three one-offs – stake sale in GRUH resulting in one-time gain of Rs16.3bn, re-measurement of DTA resulting in a charge of Rs2.4bn and higher dividend income. AUM growth remained soft at 13% pulled down by non-individual loans. Gross stage 3 loans rose 7% qoq (12% qoq in 1Q)
• AUM growth of 13% yoy and 3% qoq was same as in 1Q. Individual loans grew 17% yoy / 4% qoq while non-individual loan growth remained subdued at 3% yoy / flat qoq. Affordable housing accounts for 36% of the total volume of approvals and 18% of total value (17% in 1Q).
• Ex assignment income (assignment income is booked upfront in INDAS), NII grew 12% yoy (declined 2% qoq) while including loans sold, NII grew 5% yoy.
• Reported spread stayed stable qoq at 2.26%. Calculated spread including loans sold down declined 7bps qoq. Excluding loans sold down, calculated spread declined 3 bps qoq. Yield on loans declined by 20bps qoq while cost of funds fell 16bps.  In the funding mix, the share of deposits and bonds has risen while bank loans have declined.
• Operating expenses grew 18% yoy. HDFC booked profit of Rs16.3bn by selling stake in GRUH. It also booked dividend income of Rs10.7bn. Last year HDFC Bank dividend was booked in 1Q, but the amount of dividend was lower at Rs5.9bn.
• Excluding dividends/capital gains/income from surplus funds, core PPOP grew 10% yoy but declined 2% qoq.
• Tax rate for the quarter includes Rs2.4bn of deferred tax re-measurement charge, write-back of taxation for 1Q and lower capital gains tax on the GRUH sale.
• Gross stage 3 loans rose 7% qoq (12% qoq in 1Q). Individual GNPAs rose 5% qoq from 0.72% to 0.73% while non-individual GNPAs rose 7% qoq from 2.68% to 2.87%. Stage 3 coverage ratio improved to 43% from 40% qoq.  The expected credit loss as % of exposure at default rose to 1.72% versus 1.33% 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.