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Home » Research » Kotak Research Center » Stock Recommendation Hdfc Add Target Price 1980
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  • Stock Recommendation | HDFC - ADD - Target price : 1,980

    Publish date: NOVEMBER 02, 2018

    Challenging times.
    HDFC’s 2QFY19 earnings were on track. However, we see nearterm challenges to the business, viz. (1) liquidity crunch in debt markets will put pressure on NIM even as the recent rate hikes provide cushion, (2) pressure on growth (in individual and non-individual segments) due to funding challenges for developers and (3) increasing asset quality risk in the non-individual book. We remain assertive on HDFC’s ability to sail though several macro challenges; retain ADD with TP of ₹1,980 (down from ₹2,020).


    18% growth in core earnings; several one-offs

    HDFC reported 25% growth in PAT to ₹24.6 bn. Core PBT (PBT before capital gains, dividend income, one-time loan assignment gains, other income, ESOP expenses and provisions) was up 18% yoy. AUM was up 17% yoy driven by 18% growth in individual loans; calculated NII was almost flat yoy, down 15 bps qoq to 2.57%. Non-core items included (1) lower ESOP expenses (₹86 mn versus ₹2.8 bn), (2) capital gains of Rs9.5 bn from HDFC AMC, (3) low dividend income of ₹58 mn (₹5.36 in 2QFY18 due to recognition of dividend of HDFC Bank) and (4) provisions of ₹4 bn (extra provisions of ₹2.6 bn) as compared to Rs616 mn write-back.


    Challenges ahead

    ▶ We find risk of compression on NIM due to rise in funding costs in bond markets and HDFC/HFCs’ shift to bank loans and deposits; this may partially be offset by higher asset yields post its recent rate hikes. HDFC has raised lending rates by 15 bps in retail loans last month (65 bps in CY2018 YTD) and 65 bps in non-individual loans (120 bps in CY2018 YTD).
    ▶ HDFC/other HFCs are taking a cautious stand in real estate lending due to liquidity challenges of developers. This may lower business momentum in the industry, which can eventually affect retail business as well; HDFC’s focus on the affordable segment somewhat helps.
    ▶ We find risk to developer book NPLs in the current environment. HDFC’s stage 3 loans were down marginally to ₹50.2 bn as compared to ₹51.5 bn in 1QFY18. While a large account of ₹9 bn was sold to ARCs last quarter, the balance (₹8 bn) was on account of slippages, mostly in the non-individual segment.


    Retain positive stance; ADD with TP of ₹1,980

    HDFC has demonstrated ability to sail though macro challenges. Its strong credit standing in debt markets and retail deposit franchise will ensure liquidity for the company even as its large balance sheet size constrains a bit. While NII may be muted in the near term, lower competition, especially in the non-individual segment, will improve its negotiating power. We are revising our estimates to factor lower NII and higher provisions. HDFC’s recent migration to Ind-AS and restatement of ECL reduces accuracy of our forecast. Retain ADD, with TP of ₹1,980.


    Exhibit

    AUM growth stable qoq, up 17% yoy
    ▶ AUM growth on track. HDFC reported 17% yoy AUM growth in 2QFY19 driven by 18% yoy growth in the individual home loan segment while the non-individual segment saw slightly lower growth at14% yoy (down 1% qoq). Individual segment witnessed robust growth for the fourth quarter in a row (>16% yoy growth). ■ Growth has mostly been driven by strong volume as average ticket size is broadly constant at ₹2.7 mn (similar to average ticket size for individual loans for the past 7-8 quarters).
    ■ A large portion of the incremental growth is coming from tier-II and lower cities as the company has increased focus on affordable housing.
    ■ Increasing contribution of the affordable housing segment continued to ramp up pace of growth in this segment. HDFC has increased focus towards the economically weaker section (EWS) and low income group (LIG) segments. These segments contributed 37% of home loans approved in volume terms and 18% in value terms during 2QFY19. The company is approving and average of 8,300 loans on a monthly basis to the EWS and LIG segments, with monthly such average approvals at approximately ₹13.5 bn. The average home loan to the EWS and LIG segment stood at ₹1.01 mn and ₹1.76 mn, respectively, stable qoq.
    ■ Non-individual AUM also recorded growth at 14% yoy in 1QFY19, lower than 18-23% over the previous five quarters. Growth has slowed down likely towards the end of the quarter.
    ▶ Loan sell-down remain high, similar to 1QFY19. HDFC sold ₹61 bn of loans to HDFC Bank (₹35 bn in 2QFY18 and ₹97 bn in 1QFY19). The increase in the amount of loans assigned to HDFC Bank in 1QFY19 and 2QFY19 was due to the fact that no loan assignments were done during August 2017-March 2018. Thus, the entire loan assignments during 1QFY19 and 2QFY19 pertained to the backlog under the arrangement.
    ▶ We forecast 17% AUM CAGR over FY2018-21E. We forecast 17% AUM CAGR over FY2018-2021E as we retain our constructive medium-term view on the sector. We have slightly moderated our estimates post recent turmoil in the sector and cautious stance of the company on the developer loan space. As discussed earlier, slowdown in real estate lending and slowdown in new launches might have a spillover impact on individual home loans. This will be partially offset by rising demand in the affordable housing segment.

    Calculated NIM expands stable yoy
    ▶ NIM stable yoy. Calculated NIM was broadly stable in 2QFY19 (up 4 bps yoy) at 2.6%. On a qoq basis, calculated NIM dropped 17 bps as NIM expanded in base quarter as surplus funds post capital issuance was parked as short-term investments leading to higher income on liquid funds. Calculated yields on AUM saw 17 bps yoy expansion to 9.8%, offset by rise in funding cost. The cost of bank borrowings saw a steep increase in 2QFY19 (up 240 bps qoq) owing to fluctuations in foreign currency loans payouts; this may be one-off due to INR depreciation and bank borrowing costs may come down next quarter.
    ▶ Rise in home loan rates to provide some comfort to yields. Despite a highly competitive environment, most HFCs and banks have increased their home loan rate in the past two months (HDFC raised its home loan rates by ~45-50 bps on the retail side from March 2018-September 2018). The company has raised home loan rates by another 15 bps in October 2018. Going ahead, rise in home loan rates will provide comfort to yields. As such impact of rise in home loan rates have not yet fully translated to yield expansion. The company has guided for stable NIMs.
    ▶ Bank term loans increase. Given the rising bond borrowing rates since 3QFY18, there is increase (up 510 bps yoy and 210 bps qoq) in share of term loans in borrowing mix. Bank borrowings have increased 58% yoy compared to 8% for NCDs and 5% for public deposits. The company has raised additional ₹50 bn of bank loans last month. The share of public deposits has dropped 210 bps qoq to 28% due to some lumpy corporate exits but this is now a focus area for the company.
    ▶ Raising bond, though at higher yields. Despite the challenges in bond markets, HDFC has been able to raise ₹60 bn bonds since September 20 through two tranches. Its bond borrowing cost increased by ~160 bps and 190 bps to 9.1% in October 2018 from October 2017 and June 2018, respectively.
    ▶ Strong market position augurs well for maintaining liquidity. HDFC has maintained a positive ALM. Its last available ALM (March 2018) shows positive ALM gap in the first bucket (1 year) of 15%. HDFC’s market instruments are rated ‘AAA’ and enjoy finest pricing in the private sector NBFC space. Comfort of banks, debt markets and retail depositors will likely ensure liquidity support even as its large size poses some challenges. The company had CPs of ₹590 bn, which it will bring down to ₹540 bn this month. About 40% of its CPs are with banks and 40% with mutual funds. It has recently received approval for ECB of US$1.5 bn and Masala bond of ₹50 bn. The company maintained cash of ₹100-120 bn on its balance sheet.
    ▶ NIM compression in our forecasts. We expect pressure on NIM for HDFC, driven by rise in cost of funds. We are building 15-20 bps lower NIM in 2HFY19 over 1HFY19. Rise in lending rates will provide some comfort going ahead. HDFC has raised non-individual rates by 65 bps (blended) in October 2018; 100 bps in wholesale, 75 bps in developer loan portfolio and 65 bps in LRD segment. However, we expect the company to moderate a bit in high-risk wholesale segments in case the liquidity stress continues.

    Asset quality stable qoq
    ▶ Gross stage-3 loans at 1.3%. Gross stage 3 loans were down marginally to ₹50.2 bn as compared to ₹51.5 bn in 1QFY19. Gross stage-3 loans were 1.31% compared to 1.37% in 1QFY19 and 1.30% in 4QFY18. A large account of ₹9 bn was sold to ARCs in the last quarter, the balance (₹8 bn) was rise on account of slippages; mostly from the developer loan portfolio. GNPL ratio (as per IGAAP) dropped 5 bps qoq (flay yoy) to 1.13% in 2QFY19. The company has revised its ECL classification and done away with stage 3A.
    ▶ ECL coverage dropped 6 bps qoq to 1.3% of overall portfolio. The company reported stage-1 and 2 loans of 98.69% of portfolio in 2QFY19. HDFC has ECL coverage of 0.81% on these loans. The overall ECL coverage on the portfolio is 1.31% (down 6 bps qoq), higher than most peers.
    ▶ Asset quality to remain stable going ahead. We forecast gross stage-3 loans to remain stable around 1.3% over FY2019-21E. The company has started to maintain a cautious stance on the developer loan portfolio given speculations over rising stress in this space. ECL coverage on stage-3 loans is expected to drop marginally to ~39% in the medium term from 42% in FY2018.

    Sharp drop in ESOP expenses
    Drop in ESOP expenses lead to reduction in cost ratios. Cost-income ratio dropped to 7.6% in 2QFY19 from 16.1% in 2QFY18 and 14.2% in 1QFY19 driven by sharp drop in employee expense. Employee expenses decreased 67% yoy on the back of steep decline in ESOP expenses by 97% yoy to ₹86 mn in 2QFY19. Adjusting for ESOP employee expenses were up 11% yoy. Cost-income ratio (adjusted) dropped 140 bps qoq to 7.4% (up 20 bps yoy). Cost ratios for the company continued to be better than peers.



    Ratings and other definitions/identifiers

    Definitions of ratings

    BUY - We expect this stock to deliver more than 15% returns over the next 12 months.
    ADD - We expect this stock to deliver 5-15% returns over the next 12 months.
    REDUCE - We expect this stock to deliver -5-+5% returns over the next 12 months.
    SELL - We expect this stock to deliver

    Our target prices are also on a 12-month horizon basis.


    Other definitions

    Coverage view. The coverage view represents each analyst's overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.


    Other ratings/identifiers

    NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.
    CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
    NC = Not Covered. Kotak Securities does not cover this company.
    RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
    NM = Not Meaningful. The information is not meaningful and is therefore excluded.



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Kindly note that as per NSE circulars nos: NSE/INVG/36333 dated November 17, 2017, NSE/INVG/37765 dated May 15.2018 and BSE circular nos: 20171117-18 dated November 17, 2017, 20180515-39 dated May 15.2018, trading in securities in which unsolicited messages are being circulated is restricted. The list of such stocks are available on the website of NSE & BSE. In case of any queries, request you to kindly get in touch with Customer Service on 18002099191/9292

Kotak securities Ltd. having composite licence no.CA0268 is a Corporate Agent of Kotak Mahindra Life Insurance Company Limited and Kotak Mahindra General Insurance Company Limited. We have taken reasonable measures to protect security and confidentiality of the Customer information.

The Stock Exchange, Mumbai is not in any manner answerable, responsible or liable to any person or persons for any acts of omission or commission, errors, mistakes and/or violation, actual or perceived, by us or our partners, agents, associates etc., of any of the Rules, Regulations, Bye-laws of the Stock Exchange, Mumbai, SEBI Act or any other laws in force from time to time.
The Stock Exchange, Mumbai is not answerable, responsible or liable for any information on this Website or for any services rendered by our employees, our servants, and us.

Please do not share your online trading password with anyone as this could weaken the security of your account and lead to unauthorized trades or losses. This cautionary note is as per Exchange circular dated 15th May, 2020.

Note: NSDL and CDSL have mapped Unique Client Codes (UCC) to demat accounts based on PAN, refer NSDL and CDSL circulars. Format for linking/delinking the UCC: NSDL: link | CDSL: link.

Clients are required to keep all their account related information up-to-date including details like email id, mobile number, address, bank details, demat details, income details etc. which will help the client to timely receive any information and to avail the various facilities relating to the Trading and Demat account. To update the details, client may get in touch with our designated customer service desk or approach the branch for assistance.

Investor Awareness regarding the revised guidelines on margin collection:-
Attention Investors :

1. Stock Brokers can accept securities as margin from clients only by way of pledge in the depository system w.e.f. September 1, 2020.
2. Update your mobile number & email Id with your stock broker/depository participant and receive OTP directly from depository on your email id and/or mobile number to create pledge.
3. Pay 20% upfront margin of the transaction value to trade in cash market segment.
4. Investors may please refer to the Exchange's Frequently Asked Questions (FAQs) issued vide circular reference NSE/INSP/45191 dated July 31, 2020, notice no. 20200731-7 dated July 31, 2020 and NSE/INSP/45534 dated August 31, 2020, notice no. 20200831-45 dated August 31, 2020 and other guidelines issued from time to time in this regard.
5. Check your Securities /MF/ Bonds in the consolidated account statement issued by NSDL/CDSL every month.
.......... Issued in the interest of Investors

Clients are hereby cautioned not to rely on unsolicited stock tips / investment advice circulated through bulk SMS, websites and social media platforms. Kindly exercise appropriate due diligence before dealing in the securities market.

Requirement of obtaining consent through OTP has been waived for off market transfer reason code “Implementation of Government / Regulatory Direction / Orders” Consent through OTP would continue to be required for all other reasons for any off-market transfers. Refer NSDL circular.

Covid-19 impact to clients:-
1. Applicable to clients on whose email id contract notes and other statements get bounced or who have opted for Physical contract notes/ other statements or Digital and Physical contract notes/ other statements :Due to the nationwide lockdown, we are unable send physical contract notes and other statements. To view them, log into www.kotaksecurities.com
2. Kindly update your email id with us to receive contract notes/various statements electronically to avoid any further inconvenience.
3. We are unable to issue the running account settlement payouts through cheque due to the lockdown. We request you to update your Bank account details to facilitate direct transfer to your linked bank account. You may approach our designated customer service desk or your branch to know the Bank details updation procedure.
4. Exchange advisory: Investors are advised to exercise caution while taking investment decisions in these unpredictable times. Clients are also encouraged to keep track of the underlying physical as well as international commodity markets. Clients are advised to undertake transactions after understanding the nature of the contractual relationship into which they are entering and the extent of its exposure to risk. Clients are further advised to follow sound risk management practices and not to be carried away by unfounded rumors, tips etc.

Filling complaints on SCORES- Easy & Quick
a. Register on SCORES portal  |  b. Mandatory details for filling complaints on SCORES  i. Name, PAN, Address, Mobile Number, E-mail ID  |  c. Benefits:  i. Effective Communication  ii. Speedy redressal of the grievances

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© 2005 Kotak Securities Limited.

Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. Telephone No.: +22 43360000, Fax No.: +22 67132430.
Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825.

CIN: U99999MH1994PLC134051. SEBI Registration No: INZ000200137(Member of NSE, BSE, MSE, MCX & NCDEX), AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586.

NSDL/CDSL: IN-DP-NSDL-23-97

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