HDFC Ltd. (HDFC IN): Q2FY17 Review: Business as Usual |
Rating HOLD Price Target INR1,280.00 (from INR1,255.00) Price INR1,334.65 |
Key Takeaway HDFC Q2 results came largely in line with our expectations. The results did not have any material surprise to lead us to change our Hold rating on the stock. With loan growth in mid-teens and NIM coming under pressure, we see valuation as stretched. We rollover earnings and up PT to Rs1,280. Retain Hold.
AuM growth flat, on balance sheet loan growth improves marginally. AuM growth remained flat up 16.5% yoy, vs 16.4% seen in FY16. Individual loan book grew 16.9% yoy. Loans sold in Q2FY17 were Rs19.4bn, below Rs28.6bn sold in Q2FY16 and Rs51.1bn sold in Q1FY17. Despite the lower off-balance sheet transfer of loans, on balance sheet loans grew at moderate 15.7% yoy.
Margins remain weak, funding mix moves toward bonds. NIM improved sequentially to 3.9% (+10 bps qoq and -20bps yoy) – very seasonal for HDFC – near the lower end of the range seen in the last 20 quarters (3.65%-4.66%). On yoy basis, calculated cost of funds was down 69bps, whereas the calculated yield was down 68bps.
Core profitability growth improved. Core PPOP grew 14.0% yoy to Rs21.7bn and was in line with JEFe. Net interest income grew 14.5% yoy, mainly driven by 15.7% yoy loan growth, offset by slightly deteriorating margin. Non-interest income for Q2FY17 was up 51% yoy on good core fee and increased dividend income. However, sequentially non-interest income was down 40% as Q1FY17 includeing gains from the sale of HDFC Ergo stake.
Asset quality slightly worsened, credit cost returns to normal run rate. Non-individual loans GNPAs at 111bps were flat qoq and yoy (111bps in Q1FY17 and 112bps in Q2FY16). Individual loan NPAs (61bps) worsened slightly both yoy (53bps) and qoq (59bps). Total gross NPA was 76bps, up 5bps yoy and 1bps qoq. Net NPA was 54bps, up 4bps yoy and down 1 bps qoq. In Q2FY17 the credit cost returns to its normal run rate and was 13bps.
Tweaking our estimates. We have adjusted our estimates to reflect our expectation of slightly lower NIM leading to lower NII. However, we expect higher non-interest income (treasury gains) to offset this decline in NII. Overall we increase our FY17-18E profit by 2%. We expect loan growth of ~18% but at lower spreads resulting in FY16-19E EPS CAGR of 6.4%.
HDFC trades at 5.7x BV (Sep 16, not grossing for unrealised gains) and 28.7x EPS (12m Sep 17E) versus 10yr avg. of 5.4x and 23.9x respectively. We value HDFC at 5.1x BV (Sep 17E) and 25.6x EPS (12m Sep 18E). Downside risk: Weak volumes, asset quality worries. |
Nilanjan Karfa *, Equity Analyst Avinash Singh, CFA *, Equity Associate
* Jefferies India Private Limited |
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