Housing Development Finance Corporation Strong fundamentals
Powered by the Sharekhan 3R Research Philosophy Banks & Finance Sharekhan code: HDFC Result Update Update Stock
3R MATRIX + = - Summary We maintain a Buy rating on the stock of HDFC Ltd with an unchanged price target (PT) of Right Sector (RS) ü Rs 3100. HDFC posted enthusing performance for the Q4 FY2021 quarter, with the operational Right Quality (RQ) ü numbers coming in better than expectations, but a slight worsening of asset quality on a sequential basis was a dampener. Asset Quality deteriorated a tad q-o-q, with GNPAs at 1.98% for Q4 FY2021 compared with Right Valuation (RV) ü Q3 FY2021 GNPA, but resilient individual segment, improving Collection Efficiency and well provided book provides a cushion to profitability + Positive = Neutral - Negative Valuation at 4.4x / 4.0x FY2022E / FY2023E ABVPs, stock has corrected by ~13% from highs, and risk reward is favourable. What has changed in 3R MATRIX HDFC Ltd posted enthusing performance for the Q4 FY2021 quarter, with the operational Old New numbers coming in better than expectations, but a slight worsening of asset quality on sequential basis was a dampener. Net Interest Income (NII; Calc.) came in at Rs 4464 crores RS which was up 18.1% y-o-y and up by 1.1% q-o-q basis and came better than expectations. Net Profit (PAT) came in at Rs 3180 crores which was up 42% y-o-y and up by 8.7% on a RQ q-o-q basis and was better than expectations. Due to sell-downs, and slower growth in non- individual loan segment, the growth was optically slower. Hence, the individual loan book on RV an AUM basis grew 12% y-o-y and the non-individual loan book grew by 4% y-o-y with total AUM growth at 10% y-o-y basis. However, after adding back loans sold in the preceding 12 months the growth in the individual loan book, was healthy 19% y-o-y and the growth in the Reco/View Change total loan book was 15% y-o-y signifying a healthy pace. Asset Quality deteriorated a tad, Reco: Buy with GNPAs at 1.98% for Q4 FY2021, up 7BPS on QOQ basis as compared with the proforma GNPA figures. However, while the non-performing loans of the individual portfolio was stable CMP: Rs. 2,496 at 0.99% (stable on sequential basis) NPAs of the non-individual portfolio stood at 4.77% (up from 4.35% in Q3 FY2021 proforma basis). We believe by the virtue of a strong balance sheet Price Target: Rs. 3,100 (healthy Tier 1 of 21.5%) and provision carried being ~2x of regulatory requirement (carries Rs 13025 crores, against regulatory requirement of Rs 5,491 crore, with buffer) indicate the á Upgrade Maintain â Downgrade HFC continues to have strong fundamentals. Its strength in individual segment (low NPAs) and growth therein are desirable in our view given the challenges due to the pandemic. We Company details have maintained our Buy rating on the stock with an unchanged SOTP based price target (PT) of Rs 3100. Market cap: Rs. 450310 cr 52-week high/low: Rs. 2895/1486 Key positives Overall collection efficiency ratios for individual loans have improved, nearing pre-COVID NSE volume: 47.3 lakh levels. The collection efficiency for individual loans in the month of March 2021 stood at (No of shares) 98.0% compared to 96.3% in the month of September 2020. BSE code: 500010 Healthy loan book traction led by Individual loan segment. The growth in the individual loan book, after adding back loans sold in the preceding 12 months was 19%. The growth in the NSE code: HDFC total loan book after adding back loans sold was 15%. Free float: Key negatives 180.0 cr (No of shares) Sharp rise in employee costs at Rs 282 crore, up by 102% y-o-y as the business expenses normalize. Shareholding (%) Our Call Promoters 0.0 Valuations: HDFC is currently available at 4.4x / 4.0x its FY2022E / FY2023E adjusted book value, which is reasonable considering its robust operating metrics, pedigree, its strong brand FII 72.0 recall across product categories, and a sustainable business model. The stock has corrected by ~13% from its recent highs, and we believe risk reward is favourable for long term investment. We DII 17.3 believe that the consistency and relative outperformance of HDFC will help it sustain growth as well as valuations. HDFC Ltd carries an MTM unrealised gain of Rs 261,590 crore on account of Others 10.7 subsidiaries’ value, which provides support to its valuation. The provisions carried by HDFC Ltd as a percentage of the exposure at default (EAD) is equivalent to 2.6% provides investor comfort. Price chart We maintain a Buy rating on the stock with an unchanged SOTP-based PT of Rs. 3,100. 3300 Key Risks
2800 Due to the second wave of the pandemic, there may be slower / delayed recovery in economy, and also higher slippages which may impact earnings outlook. 2300
1800 Valuation Rs cr 1300 Particulars FY19 FY20 FY21 FY22E FY23E 20 21 20 21 - - - - Net Interest Income 11,403 12,904 15,172 12,523 15,331 Jan Sep May May PAT 9,632 17,770 13,585 11,303 13,247 Price performance EPS 55.9 102.9 75.8 63.0 73.9 P/E (x) 44.6 24.3 32.9 39.6 33.8 (%) 1m 3m 6m 12m ABVPS 400.9 449.2 528.5 569.4 617.4 Absolute 0.9 -8.7 16.1 47.7 P/ABV (x) 6.2 5.6 4.7 4.4 4.0 Relative to 0.9 -4.6 0.5 -7.8 ROE % 12.3 31.1 14.4 10.2 11.1 Sensex ROA % 2.2 5.5 2.7 1.8 1.8 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates
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Key Concall Highlights Asset quality movement: Stage 1 was 91.4, stage 2 6.3 was stage 3 was 2.3%. Total provision is 2x of regulatory requirement and have been very proactive in downgrading loans which show signs of stress from stage 1 to stage 2. Movement from Stage 2 to stage 3: Stage 2 loans declined q-o-q due to some repayment, resolutions, and some downgrade to Stage 3. Non Individual NPA: Projects which are struck, even though new money given to help complete the construction, but still is classified as NPA. Growth: Robust growth seen in cities, Ticket size has increased in metro cities. Growth was been in across the cities in India during FY2021. Total growth in Q4 was 60% and was 40% growth in disbursement in Q3 FY2021. For Q4 disbursement was 33% of loans where in EWS / LIG and 67% was in MIG category. Provision cost: Historically the trend was of provision cost of 10-15 BPS but provisions has gone up of late. HDFC will continue its policy of keeping high provisions. Need to be carrying Rs 5491 crores as provision but are presently carrying Rs 7534 crores of provision which is over and above provision from the regulatory requirement. Outlook on Provisions: Due to second wave of Covid 19, there was no clarity on the provision requirement, and hence carry extra provisions and also carry provision buffer. Non Individual Stage 2 book is at Rs 34000 crore, out of which restructuring was Rs 5000 crores. Even though the security cover is adequate, yet if the deverloper is slipped on payment, will downgrade to Stage 2. Stage 2 loan in the non-individual segment is also including ECLGS loans. Collection efficiency is seasonally better in March month usually. Hence CE in April is lower on month-on- month basis, due to the higher base in March. Compared to Pre covid levels, CE is same level. CLSS scheme for MIG segment: No extension done for the scheme. HDFC doesn’t see material impact if the scheme is extended, as the house purchase is need based. Insurance stake reduction asked by IRDAI but RBI has not asked HDFC to do so. CLSS scheme for MIG once over, would not be impacted by the slower offtake if the incentives are withdrawn. Housing demand: Saw an increase in demand for the housing loan demand last year when the lockdown ceased. Expect the latent demand for Housing loans to continue. . Collection Effiiciency is at 98% levels, includes earlier payments also in it. Looking at covid situation, the HDFC management is cautious. Disbursement for Q4 FY2021 was 60% on Individual book even though Q4 FY2021 had some impact of Covid. For FY2021 was Rs 160000 crores, and for Q4 was Rs 40,000 crores. Enquiries have seen some impact in May month, but it is early to say about the quarter. Pricing pressure not there, spreads have widened on yoy basis. Have been proactive in cutting rates on deposits, and borrowing costs decline helped the margins. Prepayment was 10.91% was FY2020 but was 10.3% for FY2021. Historically HDFC had 10-12% of prepayment at the beginning of the year. Partnership announced with another HFC: Would be happy to look for other opportunity but right now no concrete plan so far. 17% of loans are via partnerships (including HDFC Bank, etc). No dilution of any loan standards of HDFC in this relations. NIM outlook: NIM has been in range of 3.2-3.5% and spreads have been stable. There is negative carry on surplus liquidity. As that comes down, will be positive for NIMs. Outlook is stable for NIMs. Disbursement in non-individual segment is based on conscious decision of HDFC. Total construction book was 14% 3-4 years ago which now is ~10%. The decline was partly due to prepayment of around Rs 9000 crores.
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Results (Standalone) Rs cr Particulars Q4FY21 Q4FY20 Y-o-Y (%) Q3FY21 Q-o-Q (%) Revenue from Operations 11,697.1 11,975.7 (2.3) 11,707.0 (0.1) Interest Income 10,446.0 10,963.2 (4.7) 10,710.2 (2.5) Surplus from deployed in Cash Mgmt MF Schemes 147.0 241.4 (39.1) 127.2 15.6 Dividend Income 110.6 2.1 5,214.9 2.2 4,879.7 Rental Income 24.7 21.4 15.2 16.5 49.1 Fee & Commission income 67.4 65.7 2.6 53.2 26.9 Profit on loss of control over a subsidiary - - NA - #DIV/0! Net gain / (loss) on Fair Value Change 466.1 427.6 9.0 230.3 102.4 Fair Value gain (merger of Gruh) - - NA - NA Profit on Sale of Investment - 2.5 NA 157.1 (100.0) Profit on Sale of Investment Properties (2.2) 14.3 (115.4) - NA Income on de-recognised / assigned loans 437.5 237.6 84.2 410.3 6.6
Total Operating Income 11,697.1 11,975.7 (2.3) 11,707.0 (0.1) Other Income 10.4 5.9 75.6 9.3 11.7 Total Income 11,707.5 11,981.7 (2.3) 11,716.3 (0.1)
Finance Cost 6,566.0 7,661.8 (14.3) 6,832.7 (3.9) Net Interest Income 4,464.6 3,780.3 18.1 4,415.0 1.1
Employee Benefit Expenses 282.0 139.6 102.0 290.5 (2.9) Establishment expense 2.7 5.2 (48.2) 9.0 (70.1) Other Expenses 177.3 165.5 7.2 186.0 (4.7) Depreciation and Amortisation 36.6 43.2 (15.2) 51.6 (29.1) Pre Provision Profit 4,642.9 3,966.4 17.1 4,346.5 6.8
-less: Provision on Expected Credit Lossed 719.0 1,274.0 (43.6) 594.0 21.0 Profit before Tax 3,923.9 2,692.4 45.7 3,752.5 4.6 Tax Expense 744.1 459.9 61.8 826.7 (10.0) - Current 852.6 541.7 57.4 756.3 12.7 -Deferred Tax (108.5) (81.8) 32.7 70.5 (253.9) Profit after Tax 3,179.8 2,232.5 42.4 2,925.8 8.7 Source: Company; Sharekhan Research
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Outlook and Valuation n Sector view - Long term Outlook attractive for HFCs Long-term structural indicators remain strong for housing and mortgages in India. Interest rates are low and several states have given incentives for home buying, which is likely to prop up demand. The correction in the borrowing costs, which was steep for high-rated NBFCs, is another positive. Moreover, rising affordability and softening pricing (helped by tax incentives) are positive for demand offtake and LTV outlook for HFCs. India has a young population and government schemes such as CLSS, etc, which will facilitate even the affordable housing segments, are also enablers along with low penetration levels of mortgages in India (at 10% of GDP, against 18% in China and 56% in the US). We believe that the economic recovery is also gaining momentum and stimulus/supportive measures by the government and the Reserve Bank of India (RBI) will further aid to the same. We believe the outlook is resilient for well-run NBFC sector in general and HFCs in particular. n Company outlook - Strong metrics, with resilient asset quality Q4 results have several positives of strong collections, improving disbursals and stable margins. While there was marginal sequential rise in GNPAs, they were well contained and indicate a strong book quality. Also, the high provisions cover and stable margins would continue to be supportive for profitability. Balance sheet strength, consistency, and quality of earnings continue to be the key differentiators for HDFC, which support long-term investments. HDFC is well-capitalised and its book with high quality granular individual loans make it comfortably placed. Given the market dominance of HDFC, we expect the leadership to sustain going forward, even as growth momentum in Housing market is encouraging. HDFC’s strong operating metrics, supported by its industry’s best credit rating, enable it to attract best rates and, hence, optimum COF, which will be crucial supports for margins. n Valuation - Maintain Buy rating with an unchanged PT of Rs. 3,100. HDFC is currently available at 4.4x / 4.0x its FY2022E / FY2023E adjusted book value, which is reasonable considering its robust operating metrics, pedigree, strong brand recall across product categories, and a sustainable business model. The stock has corrected by ~13% from its recent highs, and we believe risk reward is favourable for long term investment. We believe that the consistency and relative outperformance of HDFC will help it sustain growth as well as valuations. HDFC Ltd carries an MTM unrealised gain of Rs 261,590 crore on account of subsidiaries’ value, which provides support to its valuation. The provisions carried by HDFC Ltd as a percentage of the exposure at default (EAD) is equivalent to 2.6% provides investor comfort. We maintain a Buy rating on the stock with an unchanged SOTP-based PT of Rs. 3,100.
SOTP Valuation Particulars % Stake Valuation Parameter FY23E BVPS Multiple Value per share HDFC Ltd (standalone) FY23E BVPS 652.6 2.5 1,624
% Stake Valuation Parameter Value Multiple Value per share HDFC AMC 52.68 FY23E EPS 75.0 30.0 170 HDFC Life 49.99 FY23E EVPS 162.4 5.0 477 HDFC Bank 26.1 FY23E BVPS 403.0 3.8 1447 Others 15 2109 Holdco discount 30% Value added per share Final Value per share 3100 Source: Company; Sharekhan Research
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One-year forward P/BV (x) band
7.0
6.0
5.0
4.0
3.0
2.0
1.0
- May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 May-21
PBV +1 sd -1 sd 3-yr Avg
Source: Sharekhan Research
Peer valuation P/BV (x) P/E (x) RoA (%) RoE (%) Particulars CMP (Rs) FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E HDFC Ltd 2,496 4.4 4.0 39.6 33.8 2.0 1.8 10.9 10.4 LIC Housing Finance 423 1.0 0.8 6.0 5.4 1.1 1.2 12.6 13.5 Bajaj Finance 5491 7.5 6.2 40.2 33.0 3.9 3.7 20.3 20.6 Source: Company, Sharekhan Research
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About company Housing Development Finance Corporation (HDFC) Limited is a major provider of finance for housing in India. The company (via its subsidiaries and group companies) is also present in banking, life and general insurance, asset management, venture capital, realty, education, deposits, and education loans via its formidable subsidiaries. As pioneers in housing mortgages, it is a brand name that has been characterised by trust, solidity, both financial and managerial, and sound principles. Established in 1977, HDFC has been able to maintain and set high standards in the housing finance sector.
Investment theme HDFC has a strong portfolio of subsidiaries, which are market leaders in their own respective fields, which add to the value of the parent. By virtue of its strong market position, it has been able to withstand most market headwinds in the recent past. We believe balance sheet strength, consistency, and quality of earnings continue to be the key differentiators for HDFC, and will help it tide over challenges. We believe HDFC is an attractive business franchise due to its strong retail book, a quality developer finance book (with sufficient cover), opportunity of quality market share gains (AUM growth), access to reasonably priced funds, and superior underwriting practices.
Key Risks Due to the second wave of the pandemic, there may be slower / delayed recovery in economy, and also higher slippages which may impact earnings outlook.
Additional Data Key management personnel Renu S Karnad Managing Director Mathew Joseph Chief Risk Officer Mr V Srinivasa Rangan Whole Time Director Source: Bloomberg
Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Life Insurance Corp of India 5.0 2 Vanguard Group Inc/The 4.3 3 Invesco Ltd 4.3 4 JPMorgan Chase & Co 3.8 5 Invesco Adviser Ltd 3.7 6 BlackRock Inc 3.1 7 Republic of Singapore 3.0 8 SBI Funds Management Pvt Ltd 2.6 9 FMR LLC 1.8 10 T Rowe Price Group LLC 1.5 Source: Bloomberg
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
May 07, 2021 7 Understanding the Sharekhan 3R Matrix Right Sector Positive Strong industry fundamentals (favorable demand-supply scenario, consistent industry growth), increasing investments, higher entry barrier, and favorable government policies Neutral Stagnancy in the industry growth due to macro factors and lower incremental investments by Government/private companies Negative Unable to recover from low in the stable economic environment, adverse government policies affecting the business fundamentals and global challenges (currency headwinds and unfavorable policies implemented by global industrial institutions) and any significant increase in commodity prices affecting profitability. Right Quality Positive Sector leader, Strong management bandwidth, Strong financial track-record, Healthy Balance sheet/cash flows, differentiated product/service portfolio and Good corporate governance. Neutral Macro slowdown affecting near term growth profile, Untoward events such as natural calamities resulting in near term uncertainty, Company specific events such as factory shutdown, lack of positive triggers/events in near term, raw material price movement turning unfavourable Negative Weakening growth trend led by led by external/internal factors, reshuffling of key management personal, questionable corporate governance, high commodity prices/weak realisation environment resulting in margin pressure and detoriating balance sheet Right Valuation Positive Strong earnings growth expectation and improving return ratios but valuations are trading at discount to industry leaders/historical average multiples, Expansion in valuation multiple due to expected outperformance amongst its peers and Industry up-cycle with conducive business environment. Neutral Trading at par to historical valuations and having limited scope of expansion in valuation multiples. Negative Trading at premium valuations but earnings outlook are weak; Emergence of roadblocks such as corporate governance issue, adverse government policies and bleak global macro environment etc warranting for lower than historical valuation multiple. Source: Sharekhan Research Know more about our products and services
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