HDFC Ltd’s Q4FY22 performance was ahead of our expectations, with 13% y- o-y growth in core PPOP (up 8% q-o-q). Calculated NIMs expanded 15bp q-o-q supporting ~14% y-o-y NII growth. Incrementally, growth is now recovering in the non-individual segment, growing 6% q-o-q, which was in addition to the benefit of lower liquidity in Q4 aiding NIMs. AUM growth of 14% y-o-y (5% q- o-q) was ahead of our expectations, with the individual segment growing at 16% y-o-y as well as growth picking up in the non-individual segment (up 5% q-o-q). Disbursement momentum remains strong, with 18%/37% y-o-y growth in Q4/FY22 despite the high Q4FY21 base.
Asset quality is also holding up well, with Stage-3 reducing 40bp q-o-q to 1.9% and the large corporate restructured account now fully recovered. We expect HDFC to deliver a 14-15% CAGR in AUM, with a core mortgage PPOP CAGR of 13% over FY22-25F. We maintain our Buy rating with a reduced TP of `2,850, implying 2.1x/16x FY24F book/EPS (2.5x earlier) adjusted for the subsidiary value of Rs 1,430 at a 20% holco discount.
Strong traction; continues to gain market share: Management highlighted that demand in the mortgage segment remains strong, and the pipeline for construction finance and LRD remains strong. Disbursement traction remains very strong. HDFC has been consistently gaining market share since the IL&FS crisis, with a few NBFCs vacating the space, and has been growing faster than the banking sector as well.
PPOP traction strong; spreads intact despite lower incremental spreads: Spreads improved 15bp q-o-q aided by: (i) lower liquidity of `450 bn vs Rs 550 bn q-o- q; and (ii) a pickup in the non-individual segment.This aided 13% y-o-y and 8% q- o-q PPOP growth. Incremental spreads have been coming off in mortgages over past four months and are now 81bp vs ~100bp earlier. Mgmt remains confident the firm can maintain spreads given the pick-up in the non-individual segments and increase in lending rates in both segments.
Commentary on merger: Mgmt highlighted significant synergy benefits arisingoutofmergerwithHDFCB. Distribution is expected to strengthen materially, and cross-selling remains a large opportunity. This should aid further market share gains in the mortgage segment. In addition to this, funding cost reduction could provide further support to its competitive positioning.