Growth in construction finance key; rise in margin, core RoE still some time away; ‘Hold’ maintained with revised TP of Rs 3,040
Strong pick-up in retail individual disbursements drove improvement in HDFC’s AUM growth to 10.5%. Sequentially, the gross AUM mix has been stable and hasn’t moved further towards individual loans. Core RoE was at 12.4%. Q2FY22 loans outstanding stood at Rs 5,075 bn, +10% y-o-y / +4% q-o-q led by individual segment growth of +15% y-o-y / +4% q-o-q. Reported spreads remained stable at 2.3%; however, NIM continued to contract at 3.6% impacted by lower yields due to higher share of individual loans. Gross Stage 3 assets stood at 2.6% in Q2FY22 (2.7% in Q1FY22). However, restructured loans increased to 1.4% in Q2FY22 from 0.9% in Q1FY22.
Highlights from commentary: Q2FY22 individual segment disbursements were c Rs 380 bn, +44% y-o-y / +48% q-o-q. For the six months ended Sep 2021, individual approvals grew 67% by value and 42% by volume as there was a pick-up in the high-end housing market. Total restructured loans stood at Rs 72 bn (1.4% of total loans), of which 63% comes from the individual segment.
HDFC witnessed a gradual pick-up in non-individual loans in Q2FY22 led by the lease rental discounting (LRD) segment. The management expects to exit FY22e with positive loan growth for the non-individual segment. Demand for housing in Tier 2 centres is picking up strongly, so are construction finance projects. Mgmt indicated the pipeline for construction finance projects is strong, which would start contributing to growth in 2-4 quarters.
Margin, core-RoE improvement still some time away, maintain Hold: HDFC’s core lending franchise is currently valued at 2.1x FY23e BVPS (adjusted for the value of its subsidiaries) whereas as per our calculation, its lending business generates a core-RoE of 12-13%. The key trigger to the stock’s performance is likely to be an improvement in the growth rates seen in construction finance, as that will lead to an improvement in NIMs and core RoE and accelerate profit growth. This is potentially 2-3 quarters away. Subsidiary valuations are elevated as well.
Therefore, we estimate modest upside from current levels in the medium term. Maintain Hold. We leave our earnings estimates unchanged. Our TP is raised to Rs 3,040 due to an increase in our valuation of HDFCB earlier in the quarter.