Growth moderates; 'Reduce' on HDFC shares: Kotak

Updated: May 19 2014, 12:37pm hrs
HDFCs Q4FY14 PAT (R17.2 bn) was up 11% y-o-y. Moderation in loan growth to 16% and lower-than-expected NIM (net interest margin) tempered its overall performance. We expect HDFCs business trajectory to remain range-bound in the light of challenges in the mortgage businesslow growth and high competition. We revise our earnings estimates downwards, roll over target price to R890 (from R850). Retain Reduce.

Operating environment challenging

Two drivers of core growth: HDFC reported 11% growth in net operational income. Two drivers of weak core growth(i) loan growth was low at 16% y-o-y during Q4 (down from 18-22% in the past). While the retail segment has been growing at a faster clip than non-retail loans, a large base, weak demand and high competition are pulling down growth in the retail business as well, and (ii) higher borrowing cost in the system post the liquidity tightening during Q2 has resulted in marginal y-o-y compression in calculated spreads.

Moderate growth in our forecast: HDFC has reported weak (10-12%) earnings growth for three consecutive quarters; this is lower than 17-19% y-o-y profit after tax growth in the past, likely reflecting the challenges in the core (mortgage) business. We expect disbursements and loan growth to remain in the mid-teen levels (15-16%) over the next two years as we neither model a significant improvement in demand nor lower competition; consequently earnings growth will be about 15% y-o-y. A decline in interest rates in the system will, however, boost its NIMs and provide an upside to our estimates.

Consolidated earnings up 16% y-o-y: HDFCs consolidated earnings were up 16% y-o-y to R24 bn. Operating income was up 6% y-o-y while operating expenses grew 2% y-o-y on a high base.

*HDFC Life reported PAT of R7.5 bn, up from R4.5 bn in FY2013; the company reported new business margin of 26% in the individual business, which is higher than 17-18% reported in the past.

*HDFC Ergo reported a profit of R2 bn (as compared to R1.5 bn in FY2013); its gross premiums were up 20% y-o-y to R30 bn.

*HDFC AMC delivered 14% growth in AUMs (assets under management) to R1.2 tn and earnings of R3.6 bn (0.3% of average AUMs), up from R3.2 bn in FY2013.

Loan growth slows down

*HDFCs overall loan book growth slowed to 16% y-o-y to R2 tn, lower than 19-22% y-o-y growth reported between FY09 and FY13. In the retail segment, HDFC has reported a 22-24% y-o-y growth during the past seven quarters, which declined to 20% during Q4FY14. Non-retail loans have also slowed down to 9% y-o-y from 13% in FY2013; the company has delivered lower growth in this segment for the past four quarters.

*Loan disbursements were weak, growing only 3% y-o-y during Q4FY14 as compared to 13% in Q3FY14. For the full year, disbursements grew 12% y-o-y, compared to >15% y-o-y growth in the earlier years. Retail disbursements growth of 21% y-o-y during FY2014 appears strong.

*Our forecast does not factor high growth. We expect loan growth to moderate to 16% CAGR in FY15-16e on the back of muted growth in disbursements and approvals in FY14 and our expectations of subdued markets.

NIM expands 70 bps q-o-q; declines 30 bps y-o-y: NIM improved 70 bps q-o-q to 4.3% from 3.6% in Q3FY14, in line with seasonal trends as collections improve in Q4. Reported loan spreads were stable at 2.3%. We model stable NIM in our forecasts.

Cost of borrowings increased by 20 bps y-o-y to 9.16%. Two key reasons: Higher borrowing cost over the past three quarters as compared to FY13 and lower zero coupon bonds (ZCB) on balance sheet. The provision on redemption of ZCB, adjusted with share premium account, declined to R770m from R1.2 bn y-o-y.

Kotak Institutional Equities