EUR 120.00 For Business Accounts Only

MOSL: HDFC (Buy)-Healthy retail growth-core operating performance in line

HDFC: Healthy retail growth; core operating performance in line
(HDFC IN, Mkt Cap USD52.7b, CMP INR2124, TP INR2600, 22% Upside, Buy)

** PAT grew 46% YoY to INR32b in 1QFY20 (15% beat), driven by lower opex (32% below estimate), higher assignment income (+2x YoY to INR3b) and a lower tax rate (19% v/s our estimate of 26%). Asset quality was stable sequentially, with GS3 % at 1.6% (+10bp QoQ).

** AUM grew 3% QoQ (+13% YoY) to INR4.8t and continued to be driven by individual loans (up 4%QoQ/17% YoY to INR3.6t). On the other hand, corporate segment AUM grew merely by 2% YoY to INR1.2t (albeit on a high base), as large unscheduled repayments happened during the quarter. Management is now looking at selectively growing the portfolio. Share of corporate AUM now stands at 25% v/s 27.6% in 1QFY19.

** Loan assignments continued at a healthy pace - HDFC sold down INR73b in the quarter v/s INR24b in 4QFY19 and INR97b in 1QFY19. However, upfront income on assignment nearly doubled YoY to INR3.0b.

** Core NII on loans increased 11% YoY, in line with loan book growth. Reported spreads were largely stable at 2.3%. Calculated cost of funds (CoF) increased ~60bp YoY to 8.4%. We do not foresee any meaningful increase in CoF hereon, and spreads are likely to remain stable. Management aims to maintain higher liquidity on balance sheet (INR170b v/s INR70b a year ago), given the uncertain macro situation.

** HDFC sold 10% of the GRUH stake (booking a gain of INR18.5b) to comply with the merger requirement with Bandhan Bank. A similar quantum is expected to be sold before end-CY19. According to the policy, it created 30% provisions out of the gains from the transaction.

** The share of bonds and CP reduced 300bp QoQ to 47%, as the company migrated to a higher share of bank borrowings and deposits.

** GNPL ratio rose 10bp QoQ to 1.3%, driven by ~34bp increase in the corporate GNPL ratio to 2.7%. A large aviation account worth INR4b slipped during the quarter. The company wrote-off loans worth INR2b during the quarter, 50% of which were toward a stressed infra group trust account. HDFC reduced its stage 3 provisioning QoQ from 44% to 40%. Overall ECL provisioning on balance sheet stands at 1.6% of loans.

** Valuation view: Over the past three quarters, HDFC has maintained a cautious stance on the wholesale segment - the share of wholesale loans in overall AUM declined 250bp+ to 25% over the past few years. In the current liquidity scenario, we believe well-established companies with a strong parentage would get a clear preference in raising money from debt markets and banks

** HDFC is well placed to capitalize on this. The company is well-capitalized (Tier I - 17.3%), with its net worth doubling (to INR737b+) over FY17-19, helped by capital raise of INR120b+, warrant conversion of INR55b+ and strong internal accruals. Subsidiaries are performing well and contribute 50% of SOTP. We maintain our estimates. Buy with a TP of INR2,600.