MOSL: HDFC (Buy) -Superior execution-consistent performance-Core RoE ~18% I Value of subsidiaries increasing

HDFC: Superior execution; consistent performance; Core RoE ~18% I Value of subsidiaries increasing

(HDFC IN, Mkt Cap USD46.5b, CMP INR1830, TP INR2225, 22% Upside, Buy)

• HDFC is not just a play on rising mortgage penetration, but also on increasing financial literacy and financialization of savings in India. Having incubated several subsidiaries over the past two decades, HDFC derives almost 50% of its value from its subsidiaries, up from ~30% in FY13. In addition, there are still some segments, like health insurance, where HDFC is to yet to enter.
• The core mortgage business is on a stable growth trajectory, despite intensifying competition. The corporate lending business, on the other hand, has witnessed a revival over the past few quarters, after 3-4 years of modest growth.
• HDFC is well equipped to take care of its own growth and growth capital requirement of subsidiaries, with (a) large capital issuance of INR130b, (b) expected warrant conversion of INR53.9b, and (c) capital gains from HDFCMF (INR15b+). Of this, we expect INR85b to be utilized for HDFCB stake (already announced) and INR45b for other ventures (new segments like health insurance, stressed asset acquisition, investments in affordable housing projects, etc). As there are no firm announcements for INR45b, we have valued it at 1x cash.
• Despite the huge capital raising, HDFC will still maintain core RoE of ~18% over the medium term. We use SOTP to value the company (core business at 20x EPS and 3.2x BV) and arrive at a TP of INR2,225. Buy.