Spike in Covid cases may not disrupt business; asset quality is holding up; valuations attractive; ‘Buy’ retained with TP of Rs 3,380
15-18% AUM growth to be achievable in the medium term led by retail segment.
We hosted Conrad D’Souza from HDFC Ltd for an investor call where he highlighted that (i) while Covid cases have risen, risks of lockdowns/business impact are much lower; (ii) housing demand should hold up, even with some price-hike/withdrawal of stamp-duty cuts and (iii) asset quality pressure is holding up and provisions are adequate; SC’s verdict should allow lenders to pursue collections. Valuation at 2x FY22 adj. PB is attractive and we rate HDFC as Buy.
Covid cases may not disrupt business: Even as mgmt remains watchful of the recent spike in Covid cases, especially in the state of Maharashtra, they believe impact will not be as stringent or prolonged as in the past. HDFC Ltd has also strengthened its digital processes, and a large portion of its staff has been empowered to work remotely. Even in the city of Mumbai, despite the rise in cases on the ground, demand/activity has been stable.
Healthy growth outlook: Housing demand has seen a strong pick-up in recent quarters and this should help to keep disbursements flattish y-o-y versus their expectation (in mid 2020) of seeing about 25% decline. FY22 should see 30-35% disbursement growth on a low base and healthy demand. Mgmt believes demand should hold up against a moderate rise in real estate prices and even withdrawal of stamp-duty concession in Maharashtra. They expect 15-18% AUM growth to be achievable in the medium term led by retail segment.
SC ruling can help recoveries; provisioning adequate: Management believes that the recent Supreme Court ruling will (i) imply that defaulters will be recognised as NPL; and (ii) lenders can initiate recovery process. HDFC has disclosed proforma NPLs and even as there may be risk in corporate book, its buffer provision held at 1.2% of loans are adequate. Interestingly, while there were investor concerns on the LRD portfolio, HDFC has seen larger pre-payments following REIT issuances.
Reiterate Buy: We believe that current valuations of 2x FY22 adjusted PB are attractive. We roll forward our PT to Mar-23 and reiterate our Buy rating with a TP of Rs 3,380, including the value of mortgage lending business at 2.9x Mar-23 P/ABV.