We upgrade HDFC to ‘buy’ with revised PT of Rs 2,030 — the stock has corrected 17% in a little over two months, although underlying growth/profitability remains strong and valuations are now fair. HDFC should gain market share from its weaker HFC cousins, given its enviable ability to hold on to yields/ spreads which is also a function of its liability mix and ability to raise funds in a tighter liquidity & higher interest rate environment.
The recent events of tightening liquidity provides HDFC headroom to grow market share. We expect higher gains in developer (non-individual) loan segments as the lending appetite for mid-sized HFCs has come off significantly. Our channel checks indicate, loan proposals may have moved away from smaller HFCs on to better funded ones in the last few weeks. We bake steady 19-20% loan growth for HDFC over FY18-21E. For Q1FY19, net individual (retail) AuM (on-book individual loans plus outstanding securitized loans) grew at ~18% y-o-y and the corporate loans (primarily developer loans) at 17% yoy.
Across interest rate cycles (Dec’14 onwards) HDFC has managed a near flat yield on personal/individual housing loan (within 9.95-10.75%), which gives us greater confidence on its pricing power in this segment compared to peer HFCs. In H1FY19, HDFC has taken two rate hikes of 20 bps each, and we expect that any incremental cost of funds due to tighter liquidity conditions would also be passed on. Developer loan yields for HDFC increased sharply in the past few months (180 bps increase since June 18). As this gets translated to market share gains by HDFC in the developer segment, we expect overall NIMs to improve. We take up our NIM estimate by 17 bps building in 3.9% for FY19.
Over FY 10-18, funding profile for HDFC shifted towards greater mix of market borrowings (43% in FY10 to 57% in FY18), primarily replacing bank term loan (33% in FY10 to 15% in FY18). With (i) AMC flows towards HFCs through NCDs softening, and (ii) banks getting selective in their NBFC exposure (HDFC being preferred), mix of term loans could increase over the next few years.