INDIA DAILY November 3, 2020 India 2-Nov 1-day 1-mo 3-mo Sensex 39,758 0.4 2.7 7.6 Nifty 11,669 0.2 2.2 7.1 Contents Global/Regional indices Dow Jones 26,925 1.6 (2.7) 1.0 Daily Alerts Nasdaq Composite 10,958 0.4 (1.1) 0.5 Results FTSE 5,655 1.4 (4.2) (6.3) HDFC: Business trends improving, moratorium book to be monitored Nikkei 23,295 1.4 1.2 5.0 Hang Seng 24,460 1.5 4.3 0.0 NTPC: Strong showing continues KOSPI 2,332 1.4 0.2 3.6 IOCL: Weak results Value traded – India Embassy Office Parks REIT: Holding-up Cash (NSE+BSE) 580 554 594 11,45 Derivatives (NSE) 15,196 42,555 Whirlpool: 2QFY21 fares better than expected 6 Jindal Steel and Power: Steel continues to shine Deri. open interest 3,512 5,320 3,036 Zee Entertainment Enterprises: Slow progress City Union Bank: Need to bite into the promise Forex/money market Change, basis points Escorts: Strong performance, margins to sustain 2-Nov 1-day 1-mo 3-mo Shriram City Union Finance: Improvements continue Rs/US$ 74.5 (2) 128 (71) Results, Change in Reco 10yr govt bond, % 6.2 1 (20) 6 Bandhan Bank: Recovering gradually Net investment (US$ mn) 29-Oct MTD CYTD Just Dial: Core business on a weak trajectory FIIs (190) - 6,546 Mahindra Logistics: Swift recovery, swifter price move MFs (181) - 1,058 Company alerts Top movers Change, % Cummins India: The India ecosystem: a boon more than a bane Best performers 2-Nov 1-day 1-mo 3-mo Sector alerts AL IN Equity 82 3.6 7.3 65.9 Automobiles & Components: Festive season to be the key JSTL IN Equity 309 0.1 9.7 40.3 TTMT/A IN Equity 55 (1.1) (11.4) 38.1 HAVL IN Equity 782 7.4 17.3 33.7 APHS IN Equity 2,069 (2.4) (1.0) 31.4 Worst performers EDEL IN Equity 53 (4.9) (9.6) (31.6) IHFL IN Equity 140 0.2 (10.4) (23.2) BHEL IN Equity 28 (0.5) (5.9) (23.1) VEDL IN Equity 95 (1.1) (31.1) (17.9) BPCL IN Equity 346 (2.3) (2.0) (17.1) [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. ADD HDFC (HDFC) https://ultraviewer.et/en/own Diversified Financials NOVEMBER 02, 2020 load.html RESULT Sector view: Attractive Business trends improving, moratorium book to be monitored. Strong liability-side CMP (`): 2,041 re-pricing and improvement in business momentum during September were key positives in Fair Value (`): 2,240 HDFC’s 2Q performance. Collection efficiency in September was strong (96% in individual business) and on expected lines although the performance of its moratorium book was a tad BSE-30: 39,758 weak and may need to be monitored over the next few months. Overall business outlook remains positive with improvement in real estate sales and NIM support. Retain ADD with FV of Rs2,240 (up from Rs2,075). HDFC Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 2,041/2,240/ADD EPS (Rs) 61.3 67.7 81.5 52-week range (Rs) (high-low) 2,500-1,473 EPS growth (%) (40.3) 10.3 20.4 Mcap (bn) (Rs/US$) 3,665/49.3 P/E (X) 33.3 30.2 25.0 QUICK NUMBERS ADTV-3M (bn) (Rs/US$) 9.1/0.2 P/B (X) 3.4 3.1 2.9 Shareholding pattern (%) BVPS 606.5 650.5 703.5 Core PBT up 27% Promoters 0.0 RoE (%) 11.0 10.8 12.0 yoy FPIs/MFs/BFIs 70.2/9.4/8.7 Div. yield (%) 1.1 1.2 1.4 Price performance (%) 1M 3M 12M NII (Rs bn) 143 149 168 AUM up 10% yoy; Absolute 14.0 14.5 (4.1) PPOP (Rs bn) 162 175 198 Rel. to BSE-30 10.9 8.3 (3.1) Net profits (Rs bn) 110 121 146 individual AUM up 9% yoy Business trends displaying signs of improvement 136 bps yoy/28 bps HDFC reported 11% yoy disbursements growth in September followed by 35% yoy growth (22% qoq expansion in adjusting for festive seasonality) in October 2020, significantly improving from previous months; NIM (calculated) to the company had reported 5% yoy decline for 2QFY20. Sharp increase in real estate sales 2.69% (which likely reflects pent-up sales, price cuts, lower interest rates, lower registration charges, etc.) coupled with low home loan rates offered by HDFC (~7% for new loans) has supported business; while it still remains unclear if real estate sales will remain strong, we continue to build in moderate growth in the near term. HDFC has seen massive tailwinds from the funding side. While fall in interest rates is not fully passed on to existing borrowers (the company recently cut rates by 40 bps for existing borrowers), lockdown-related challenges reduced balance transfer applications. We expect NIM compression in 2HFY21 even as funding-side tailwinds continue. Moratorium book collections weak in September Among positive topline momentum, HDFC’s collections were a tad below expectations. The overall collection efficiency in the individual business was 96.3% in September 2020; 99.5% in case of customers who had not opted for moratorium. Thus, collections in the individual moratorium book will be low at about 81%; this compares to the non-prime vehicle finance Nischint Chawathe NBFCs (that have reported ~85-90% collections). However, HDFC’s moratorium book is much smaller (17% in last quarter) as compared to 75-90% for NBFCs. HDFC’s individual home loans M B Mahesh, CFA are finely priced and have demonstrated extremely low credit costs; in this backdrop, marginal rise in credit costs/delinquencies may be considered a negative. It’s still early days though to Dipanjan Ghosh read any trend. HDFC’s long track-record provides a longer rope. Retain ADD; FV Rs2,240 Abhijeet Sakhare We are revising our estimates by -3% to -1%. We expect HDFC to deliver 17-18% medium- term core RoE, up from near-term estimates of 14-15%; a revival in the real estate cycle will likely drive the upside; low leverage will constrain. At our SoTP-based FV of Rs2,240 for HDFC Ashlesh Sonje (up from Rs2,075, reflecting rollover to September 2022E and increase in value of subsidiaries), we value HDFC’s mortgage business at 2.1X core book using RGM; we ration Rs50 bn of recent capital raise to be infused in subsidiaries and add back Rs49 bn of MTM hit on Bandhan reflected in OCI to FY2020 net worth. [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. HDFC Diversified Financials Exhibit 1: HDFC - quarterly data Mach fiscal year-ends, 2QFY20-2QFY21 (Rs mn) Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS (% chg.) 2QFY21 2QFY21E 2QFY20 1QFY21 2QFY21E 2QFY20 1QFY21 1HFY21 1HFY20 (% chg.) 2021E 2020 (% chg.) 2022E Operating income 117,280 117,924 134,874 130,177 (1) (13) (10) 247,456 264,777 (7) 504,005 587,646 (14) 554,251 Interest income 110,020 112,026 107,809 111,524 (2) 2 (1) 221,543 215,620 3 469,672 437,493 7 511,254 Dividend income 3,230 3,230 10,738 2,982 (70) 8 6,212 10,749 (42) 6,212 10,807 (43) 15,000 Rental income 198 200 176 162 (1) 12 22 360 310 16 650 704 (8) 500 Fee and commission income 588 500 465 322 18 27 82 911 825 10 1,831 1,928 (5) 2,106 Net gain/loss on fair value change 1,660 (32) (3,223) 940 NM NM 77 2,600 (3,674) NM 3,000 91,190 (97) 4,000 Profit on sale of investment (6) 0 16,271 12,412 (100) 12,406 35,213 (65) 13,000 35,238 (63) 5,000 Profit on sale of investment properties 0 0 (1) 0 NM 0 134 (100) 500 351 42 500 Assignment income 1,590 2,000 2,639 1,834 (20) (40) (13) 3,425 5,601 (39) 9,139 9,935 (8) 15,891 Interest expense 73,991 78,171 78,307 78,171 (5) (6) (5) 152,162 155,700 (2) 326,438 310,014 5 362,685 NII 36,028 33,855 29,502 33,353 6 22 8 69,382 59,920 16 143,235 127,480 12 148,569 Net operating income 43,289 39,754 56,567 52,006 9 (23) (17) 95,295 109,078 (13) 177,567 277,632 (36) 191,566 Other income 47 50 67 16 (5) (29) 194 64 125 (49) 244 244 - 244 Total income 43,336 39,804 56,634 52,022 9 (23) (17) 95,358 109,203 (13) 177,812 277,876 (36) 191,810 Operating expenses 3,658 4,000 3,789 3,964 (9) (3) (8) 7,622 7,607 0 15,449 14,980 3 16,549 Employee expenses 1,811 1,449 1,604 25 13 3,415 3,003 14 6,101 5,929 3 6,662 Depreciation expenses 360 333 346 8 4 706 625 13 1,551 1,477 5 1,629 Establishment expenses 76 74 133 2 (43) 209 258 (19) 484 404 20 579 Other expenses 1,412 1,933 1,881 (27) (25) 3,292 3,720 (12) 7,313 7,169 2 7,678 PPOP 39,678 35,804 52,845 48,058 11 (25) (17) 87,736 101,596 (14) 162,363 262,897 (38) 175,261 Provisions 4,360 5,000 7,541 11,990 (13) (42) (64) 16,350 16,441 (1) 26,928 59,131 (54) 25,823 PBT 35,318 30,804 45,304 36,068 15 (22) (2) 71,386 85,155 (16) 135,435 203,766 (34) 149,438 Tax 6,617 6,161 5,689 5,553 7 16 19 12,170 13,509 (10) 25,733 25,813 (0) 28,393 PAT 28,701 24,643 39,615 30,515 16 (28) (6) 59,216 71,646 (17) 109,702 177,953 (38) 121,045 Tax rate (%) 19 20 13 15 -127 bps 618 bps 334 bps 17 16 118 bps 19 13 633 bps 19 Core PBT 33,660 30,646 26,459 29,904 10 27 13 63,564 53,653 18 131,974 115,734 14 136,406 Other details AUM (Rs bn) 5,403 5,489 4,901 5,316 (2) 10 2 5,403 4,901 10 5,710 5,168 10 6,393 Gross NPL ratio (%) 1.8 1.3 1.9 48 bps -6 bps 2.8 2.0 81 bps 3.0 Individual 0.8 0.7 0.9 11 bps -8 bps 1.0 Non-individual 4.2 2.9 4.1 132 bps 9 bps 4.7 CAR (%) 20.7 19.6 17.3 110 bps 340 bps 17.7 Tier I (%) 19.5 18.1 16.2 140 bps 330 bps 16.6 Key calculated ratios (%) Core yields 9.0 9.1 9.8 9.2 -7 bps -78 bps -25 bps 9.14 9.86 -73 bps 9.3 9.7 -38 bps 9.2 Cost of borrowings 6.9 7.2 8.2 7.3 -26 bps -127 bps -41 bps 7.2 8.3 -101 bps 7.4 7.9 -49 bps 7.4 Spread 2.0 1.9 1.6 1.9 19 bps 49 bps 15 bps 1.9 1.6 29 bps 1.9 1.8 12 bps 1.7 Core NIM 2.7 2.4 2.3 2.4 26 bps 36 bps 28 bps 2.6 2.4 17 bps 2.4 2.4 -4 bps 2.3 Cost-to-income 8.4 10.0 6.7 7.6 -161 bps 175 bps 82 bps 8.0 7.0 103