We met the top management of HDFC to gauge the company’s performance amidst strong government/regulatory support towards promoting the housing sector.
Key takeaways: (1) HDFC has positioned itself well in the market with launch of “HDFC Reach” scheme and has witnessed strong momentum in the government’s credit-linked subsidy scheme (CLSS). This, coupled with preponed demand, probably prior to GST and RERA implementation, has led to strong traction in disbursements; (2) there is a risk of increase in NPAs in the non-individual category given `9.1 billion exposure towards a NCLT-referred account.
However, with adequate provisioning in place, the P&L impact will be minimal; (3) the HDFC Life and Max Life merger is being restructured with the target of listing both the life insurance and AMC businesses in FY18 itself. Despite sturdy operational performance and potential value discovery, valuation at 3.9x FY19E P/BV appears fair for core operating profit growth of 14-16% and RoE of 20% in FY18/19E. We maintain ‘HOLD’.
To capitalise on government’s thrust on affordable housing, HDFC has positioned itself well in the market through “HDFC Reach” home loans, targeting customers from the middle-income group (MIG) category. Consequently, it has witnessed good momentum in CLSS. This, coupled with probable preponement of demand prior to GST and RERA implementation, led to decent traction in HDFC’s disbursements in Q1FY18.
However, this will be partially offset by higher industry prepayment rates. Also, given a high asset base, sustainability of momemtum will be key for meaningful impact on overall book growth. We are building in loan growth of 16-17% over FY17-19E post sell-downs, primarily led by decent traction in individual loans.
Given its market leadership, HDFC will be a key beneficiary of government/ regulator’s thrust on housing sector providing visibility on growth. Best-in-class cost ratios and adequate provisioning buffer will ensure steady operational performance. However, with couple of non-individual accounts showing stress, asset quality performance in this segment will be a monitorable. Value discovery through listing of HDFC Life and HDFC Mutual Fund will be a positive trigger. With the stock trading at 3.9x FY19E core mortgage book, we maintain ‘HOLD/SP’ with SoTP-based target price of Rs 1,593.