Overall, HDFC Ltd continues to navigate well in the current environment and remains the most resilient within our NBFCs/HFCs coverage.
HDFC’s Q1FY20 core mortgage business PPOP at Rs 30 bn was up 16% y-o-y, in line with our expectations. Corporate NPA build-up (2.7% from 2.4%) was marginal in the context of the tough macro. AUM growth slowdown (13% y-o-y) was driven by repayments in the builder portfolio (up just 2% y-o-y) but core mortgages growth was stable at 17% y-o-y. Overall, HDFC Ltd continues to navigate well in the current environment and remains the most resilient within our NBFCs/HFCs coverage. We maintain our Neutral rating with TP of Rs 2,300/share (2.7x Jun-21 book and ~19.5x Jun-21 earnings adjusted for current value of subs). Currently, the stock trades at 17.2x Mar-21 earnings. Key Q1FY20 highlights:
– Core mortgage PPOP in line: HDFC’s PAT at Rs 32bn was up 46% y-o-y driven by Rs 18 bn of investment gains on Gruh stake sale. Core PPOP of the mortgage business at Rs 30 bn was up 16% y-o-y.
– Growth moderation driven by builder book: AUM growth moderated to 13% y-o-y in Q1FY20 from 15% in 2HFY19. Corporate book growth slowed down to just 2% y-o-y partly due to a high base impact (7% q-o-q growth in Q1FY19) and also due to large repayment in the builder book. Core mortgage AUM grew by 17% y-o-y, which is robust. With its cost of funds coming off and large HFCs struggling for funding, we expect HDFC Ltd to sustain ~15% AUM growth over FY19-21F.
– NII growth at 12% y-o-y; NIM scenario favourable: Core mortgage NII growth came in at 12% y-o-y vs AUM growth of 13% y-o-y. NII growth was impacted in our view due to (i) higher liquidity that HDFC Ltd is carrying on its balance sheet and (ii) lower builder mix (adverse from an yield perspective). With system liquidity now in surplus and bond yields having come off and lower competition in certain segments, we do not expect pressure on HDFC’s spreads in the near term.
– Asset quality: Marginal increase in corporate NPAs but still manageable— Corporate NPAs increased from Rs 28 bn to Rs 32 bn leading to corporate NPA increasing from 2.35% to 2.7%. A material part of the increase was a corporate account on which management expects recovery shortly without any haircut. On the individual side, NPAs increased from 70bps as at Q4FY19 to 72bps.
– Provision of Rs 8.9 bn: HDFC made a provision of Rs 8.9 bn, the majority of which was against Stage 1&2 assets and some provisions for the corporate NPA, which should likely be recovered. Management has also made a prudential provision of Rs 1.4 bn against subvention loans.