HDFC reported below JEFe on the back of weaker NII, and higher OpEx & provisions. Asset quality in corporate segment had a large one-off slippage (IBC case). Net individual AuM growth trended flat. We roll-over earnings and up PT to Rs 1,590. Retain Hold. Net retail AuM growth was largely flat: After a brief surge till Q1FY17, the net individual (retail) AuM growth declined to 16.1% y-o-y in Q1FY18. Gross loans on the book were shored up by the strong corporate loan growth of 22.4% y-o-y. Gross individual loan book growth remained slow at 15.9% y-o-y, though better q-o-q vs. 13.6%.
Core PPOP growth weaker than expected: NII grew 16% y-o-y, but was 7% below estimate driven by higher interest expenses. Loan growth was strong at 17.7%. NIM (4%) was flat y-o-y. Core fee income growth was muted at 10.2% y-o-y. Operating expenses grew at 16.4% y-o-y. Other operating expenses growth was particularly high at 19.5%. Core PPOP growth was 15% y-o-y. The core PPOP was 10% below estimate on account of weaker net interest income & higher expenses.
Asset quality impacted by account under IBC: Asset quality deteriorated, with gross NPA, 1.12% & net NPA, 0.83%, rising sequentially versus 0.79% & 0.55% respectively. HDFC has exposure of rS 9.09 bn to an account which has been referred under the IBC as per the directions of the RBI. This account was recognised as an NPA in this quarter. Tweaking our estimates: We have made mild tweaks for FY18 but have increased our EPS estimates for FY19 & FY20 by 9.7% & 12% respectively, led by better loan growth & controlled expense growth. We forecast AuM CAGR of 17.6% and EPS CAGR of 11.1% over FY17-20e.
Valuation/Risks: On standalone basis, HDFC trades at 6.3x BV June’17 & 32.3x EPS June’18e. We value HDFC at rS 1,590 based on SOTP accounting for varied multiples of underlying businesses. We value core mortgage business at 3.8x BV, HDFC Bank at published price target of `2,000, HDFC Standard Life at 3x EV, HDFC ERGO at 50% premium to last deal value, AMC at 6% AuM & GRUH at market value.