HDFC Ltd's Q3FY18 results (Outperformer) – Strong loan growth but PPOP growth decelerates

• HDFC’s PAT of Rs56.7bn was higher than our estimate of Rs48bn due to lower tax. The company booked exceptional gains of Rs52.5bn from stake sale in HDFC Standard Life. Of this Rs15.75bn was used towards general provisioning. Due to net exceptional gains of Rs37bn PAT grew 2.3x yoy and 1.7x qoq. Loan and disbursal growth accelerated. However due to lower other interest, a small decline in margins and lower fees on account of lower corporate disbursals, growth in core operating profit decelerated to 11% yoy against 15% in 2Q.
• Retail disbursals grew strongly 27% yoy partly driven by the low base effect of demonetization. Retail AUMs grew 17% yoy and 4% qoq. Non retail AUMs grew 21% yoy and 5% qoq. Total AUMs grew 18% yoy and 4% qoq.. Management explained that 39% of total disbursements came from EWS/LIG segments. The ticket size in EWS is Rs1M and the average salary is Rs20,000 per month. The ticket size in LIG is Rs1.6M and the average salary is Rs50,000 per month. Rating agencies and the RBI have raised a red flag on asset quality of EWS / LIG segments. However HDFC reiterated that they are not experiencing any asset quality issues in these segments
• Reported and calculated spread declined marginally yoy by 5 bps but improved sequentially. NII from housing grew 16% yoy and 15% qoq. Other interest income declined 6% yoy.  Overall NII including other interest grew 14% yoy and 15% qoq.
• Fees declined 57% yoy due to slower corporate disbursals. Gross NPLs rose 7% qoq.
• The tax rate fell qoq to 12.6% from 28%. The huge capital gain during 3Q triggered the Minimum Alternate Tax which led to a decline in taxation. Excluding dividends/capital gains/income from surplus funds, core operating profit grew 11% yoy and 15% qoq.

Valuation and view

We reiterate Outperformer driven by revival in disbursement growth and above average performance of subsidiaries. We revise TP to Rs2,180. We value the core business at 2.4x PBV FY20E yielding Rs984. We value the subsidiaries at Rs1,193 per share based on relevant market benchmarks and subsidiary discount of 15%.