HDFC reported below JEFe on the back of weaker growth offset by better NIM – cost of funds and higher non-individual mix was a big driver. Net individual AuM growth trended further down to 15.7%. Asset quality was flat. We rollover earnings and up PT to Rs 1,500. Retain ‘Hold’.
After a brief surge till Q1FY17, the net individual (retail) AuM (on-balance sheet individual loans ex NPL plus outstanding securitised loans) growth has declined to 15.7% y-o-y. Gross individual loan book growth slowed further to 13.6% y-o-y. Loans sold in Q4FY17 were Rs 56.25 billion (of which loans sold back to HDFC Bank were Rs 45.55 billion). Owing to the decline, on balance sheet loan growth moderated to 15.6% y-o-y. Core PPOP (excluding sale of investments and dividends from subsidiary) was up 13.7% y-o-y (5.2% below JEFe). Still, NII was up 15.6% y-o-y helped by margin expansion NIM improved sequentially to 4.55% (+40 bps q-o-q but down 30 bps y-o-y) on the back of better spreads on non-individual loans as cost of funds had declined materially.
On y-o-y basis, calculated cost of funds was down 60 bps, whereas the calculated yield was down 58 bps. Spread for the quarter was 7 bps higher on a y-o-y basis at 2.3%. Spreads in individual loans were up 5 bps y-o-y to 1.9%, and down 4 bps for non-individual loans at 3.09%. Funding mix changed in favour of term loans.
Non-individual loans Gross NPA at 116 bps was flat sequentially. Individual loan Gross NPA at 61 bps improved by 4 bps sequentially. Total gross and net NPA at 79 bps and 55 bps improved 2 bps sequentially. There are Rs 4.5 billion of Security Receipts (net) on books.
We have made mild tweaks pulling down NII, offset by lower costs and higher non-interest income and a mildly higher loan loss provision. We still remain somewhat sanguine and expect overall retail growth to remain muted. We forecast AuM CAGR of 14.9% and EPS CAGR of 7% over FY17-20E.
HDFC trades at 6.2x BV Mar’17 & 32.2x EPS Mar’18E vs. 10yr avg. of 6.2x & 24.0x respectively. We value HDFC at Rs 1,500. We change valuation methodology to SOTP as underlying businesses are anchored at varied multiples. We value mortgage at 4.2x BV, HDFC Bank at PT of `1,565, HDFC Standard Life at 3x EV, HDFC ERGO at 50% premium to last deal value, AMC at 6% AuM & GRUH at market value. Downside risk: Weak volumes, asset quality worries.