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MOSL: Morning India (4/April/18): 1. HDFC (Superior execution)-2. Bulls & Bears (It’s a tale of caution and opportunity now)

MOrning India (4/April/18): 1. HDFC (Superior execution); 2. Bulls & Bears (It’s a tale of caution and opportunity now); 3. M&M; 4. BSE (Upgrading to Buy); 5. Capital Goods

 

Today’s top research idea

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

• 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.

Piping hot news

Manufacturing PMI at five-month low of 51 in March

• Manufacturing activity remained in the positive for the eighth consecutive month in March but fell to a five-month low, a private survey showed on Tuesday. The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) fell from 52.1 in February to a five-month low of 51.0 in March. A reading above 50 on the index shows growth, while one less than that denotes contraction.