Stock corner: ‘Buy’ HDFC, results reflected a modest showing

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Published: November 11, 2019 1:47 AM

FY20-22e EPS up 5-9% due to corporate tax cut; near-term could be somewhat patchy; TP revised to Rs. 2,510.

On a reported basis, retail loan spreads were at 1.95% (up 4 bps q-o-q) and corporate loan spreads at 3.09% (2 bps higher y-o-y) for Q2FY20.

HDFC’s bottomline was boosted by GRUH stake sale, but core performance was soft. While loan growth was muted in non-retail, retail loans did better (net retail AuM ~17% y-o-y). NIMs were stable. Developer loans are in a spot of bother (non-retail GNPL up 19 bps q-o-q). While near term could be somewhat patchy, HDFC’s better underwriting skills, strong distribution and cost of funds advantage will support longer-term earnings growth. Buy, PT of Rs. 2,510.

Individual loan growth steady, caution in non-retail loan growth: Gross loans grew at 11.7% y-o-y, individual (retail) loan +15.3% y-o-y, non-individual loans +2.9% y-o-y. Net AuM (i.e., net of provisions) as at the end of Q2 was Rs. 4.83 trn, registering 12.9% y-o-y growth. HDFC went slow on the corporate/developer loans given the unfavourable lending environment, tighter liquidity conditions, overleveraged and corporate debt rating downgrades leading to heightened risks across the developer/construction finance segment.

NPLs inch up, coverage increased: Stage 3 assets increased to 1.57%, up 7 bps sequentially. Gross NPL for the quarter was 1.33%, +4 bps q-o-q. GNPL in the developer loan segment worsened 19 bps q-o-q to 2.87% (possibly due to some lumpy slippage), while GNPL in the individual segment was stable q-o-q at 0.73%. ECL provision coverage for Stage 3 assets was 43% (40% in Q1) and Stage 1 & 2 assets was 105 bps (97 bps in Q1).

NIM (reported) for 1H FY20 was 3.3% (flat y-o-y) –frequent restatements make comparisons challenging, although on calculated basis, NIM was 7 bp lower y-o-y and 17 bp lower q-o-q. While cost of funds reduced by ~19 bp q-o-q, loan yields fell by 33 bps, attributable to the lower mix of corporate term loans, income reversal on higher slippage. On a reported basis, retail loan spreads were at 1.95% (up 4 bps q-o-q) and corporate loan spreads at 3.09% (2 bps higher y-o-y) for Q2FY20. Funding mix changed in favour of term borrowings (21.5% of the mix, vs 15% as of FY18), primarily replacing the bond borrowings (47.0% of the mix vs 57% as of FY18).

Core PPOP growth muted: Core PPOP (excluding gain from investment sale and dividends) declined 13.7% y-o-y. Net Interest income grew 12.1% y-o-y owing to moderating loan growth and stable NIM. Non-Interest Income grew 71.7% y-o-y owing to one-time gains w.r.t profits from stake sale in GRUH Finance. Cost ratios were stable. Core employee costs (ex-ESOP) grew 18.6% y-o-y.

Tweaking our estimates: We largely maintain our loan growth & cut our margin estimate slightly by ~6-10 bps for FY21/22, factoring in the mix shift away from non individual loans. We maintain our credit cost estimate for FY20, but elevated stress in a few of corporate stressed assets could lead to a negative surprise. Factoring in lower effective tax rate and lower dilution of shares, our EPS estimate increases by 5-9% for FY20-22. Forecast AuM CAGR of 13.4% and BVPS (standalone) CAGR of 7.4% over FY19-22e.

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