POST CONFERENCE NOTES

HDFC Steady, but not invulnerable

India Equity Research| Banking and COMPANYNAME

Key takeaways: EDELWEISS 4D RATINGS

Asset COMPANYNAME quality, moratorium and restructuring: Absolute Rating BUY  In the non-individual space, stress started emerging since the IL&FS crisis in Rating Relative to Sector Outperform September 2018. In August 2019, the government took some steps like setting up a Risk Rating Relative to Sector Low stressed asset fund for last mile financing. However, all lenders’ asset quality Sector Relative to Market Overweight suffered.

 COMPANYNAMEStress still persists because of covid-19, but measures like moratorium and now MARKET DATA (R: HDFC.BO, B: HDFC IN) restructuring are cushioning some impact.  Moratorium is almost over and there are no expectations of extension. 80% of CMP : INR 1,819 the moratorium accounts were performing earlier. Restructuring will be given on Target Price : INR 2,100 COMPANYNAMEa case-to-case basis and will not be like the moratorium, which had to be offered 52-week range (INR) : 2,500 / 1,473 Share in issue (mn) : 1,791.4 to any customer asking for it. M cap (INR bn/USD mn) : 3,226 / 36,441  The company doesn’t see any material slippages as stressed accounts can opt for Avg. Daily Vol.BSE/NSE(‘000) : 4,028.0 restructuring. Current provisioning cover is adequate as accelerated provisions were created in previous quarters. Also, as NBFCs follow Ind AS, provisioning for SHARE HOLDING PATTERN (%) moratorium book done as per ECL, so they can use the earlier contingent provisions rather than make fresh provisions. Current Q4FY20 Q3FY20 Promoters * - - -

Demand and outlook: MF's, FI's & BK’s 18.5 18.0 16.7  Loan applications are similar to last year, though this is skewed towards ready FII's 70.2 70.9 72.7 properties as there is less risk to the buyer for property completion. The company Others 11.3 11.1 10.6 * Promoters pledged shares : NIL remains particularly watchful of the luxury segment. (% of share in issue)  Repo rate pricing is not advisable for banks as it is not linked to cost of funds, but

banks have been helping in keeping prices rational by adding spreads. PRICE PERFORMANCE (%) EW Banks and Strategy: Stock Nifty Financial  The company will look at organic and inorganic growth opportunities. In terms of Services Index acquisition of housing finance companies, it makes more sense to go for portfolio 1 month (7.5) 2.7 (3.5) buyout than acquiring the company. 3 months (9.0) 10.5 (3.2) 12 months (17.9) (1.0) (25.0)

Investment conclusion HDFC’s relatively safer assets provide comfort and covid-19 does deepen its competitive moats. However, margin benefits from lower rates are not likely to accrue. Finally, the real estate crisis has now touched HDFC as well. Recently concluded capital raise buffers worst case outcomes to an extent. We maintain ‘BUY/SO’. Santanu Chakrabarti

Financials (INRmn) +91 (22) 4342 8680 Year to March FY19 FY20 FY21E FY22E [email protected]

Net revenue 1,43,286 1,51,973 1,62,591 1,70,750 Prakhar Agarwal Net profit 96,331 87,233 1,21,586 1,27,247 +91 22 6620 3076 [email protected] Diluted EPS (INR) 56.0 50.5 70.3 73.3 Adj. BV (INR) 338.3 446.7 479.6 517.0 Anisha Khandelwal Price/ Adj book (x) 1.7 1.3 1.2 1.1 +91 22 6623 3362 [email protected] Diluted P/E (x) 32.3 35.8 25.7 24.6

ROE (%) 13.9 10.0 12.2 12.0 August 18, 2020 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Banking and Financial Services

Other takeaways Asset quality, moratorium and restructuring:  Guidelines for restructuring expected within the next few days. However, this is only applicable for assets which are standard, though lenders are making a case for allowing overdue accounts as well.

 Stage 2 provisions are at 27% and Stage 3 at 43%. One Time Restructuring (OTR) will provide interim relief to hotels as it will take them a couple of years to return to 100% occupancy rates.

 Customers who were highlighting stress in their cash flows (due to job losses, business disruption etc) have LTVs of 45% hence losses will be restricted.

Demand and outlook:  Developers seem much more inclined to sell properties than before.

 The company is seeing operating performance at 80% of last year’s levels despite operating at 10% level in major cities (ex-Mumbai).

 By the next year, demand should get back to normal in the housing finance market.

Other highlights:  Compared to other NBFCs/HFCs, HDFC is better placed given access to bond market.

 The company has completed capital raise of INR140bn--INR100bn through QIP issue and remaining from warrants of three years (10% warrant premium, issued at 22% premium increase over CMP on the date of announcement).

2 Edelweiss Securities Limited HDFC

Company Description HDFC is 's largest provider of housing finance, primarily focusing on retail housing. In addition, HDFC covers additional locations through its outreach programmes, which has helped the corporation disburse housing loans in more than 2,400 towns and cities in India. It has also supplemented the distribution channel through the appointment of direct selling agents (DSA). Currently, 78.2% of the shares are held by foreign institutional investors/foreign direct investments and 12.0% by individuals. Besides the core business of mortgages, HDFC has evolved into a financial conglomerate, diversifying into other businesses through its subsidiaries viz., HDFC Standard Life Insurance (71.4%), HDFC Asset Management Company (60%), HDFC Bank (23.2%), and HDFC General Insurance Company (74%)

Investment Theme HDFC’s relatively safer assets provide comfort and covid-19 does deepen its competitive moats. However, margin benefits from lower rates are not likely to accrue. Finally, the real estate crisis has now touched HDFC too.

Key Risks Increase in competition and sustained slack in the mortgage market can lead to lower growth than our estimates.

Risk of fraud and NPA accretion due to increase in interest rates and fall in property prices is inherent to the mortgage business.

3 Edelweiss Securities Limited Banking and Financial Services

Financial Statements Key Assumptions Income statement (INR mn) Year to March FY19 FY20 FY21E FY22E Year to March FY19 FY20 FY21E FY22E Macro Interest income 401,384 441,661 481,354 526,530 GDP(Y-o-Y %) 6.1 4.8 (4.0) 7.0 Interest expended 278,319 312,782 345,099 385,853 Inflation (Avg) 3.4 4.3 3.5 4.0 Net interest income 123,065 128,880 136,255 140,677 Repo rate (exit rate) 6.3 4.4 3.0 4.0 Non interest income 20,221 23,093 26,336 30,073 USD/INR (Avg) 70.0 70.7 75.0 73.0 - Fee & forex income 2,211 2,543 2,925 3,363 Sector - Misc. income 11,823 13,745 15,994 18,625 Credit growth 14.0 11.0 13.0 15.0 - Investment profits 6,186 6,805 7,417 8,085 Deposit growth 13.0 12.0 14.0 15.0 Income from operations 143,286 151,973 162,591 170,750 Bank's base rate (%) 9.0 8.7 8.5 8.5 Net revenues 143,286 151,973 162,591 170,750 Wholesale borr. cost (%) 8.5 8.5 8.3 8.1 Operating expense 14,866 15,033 16,600 18,333 G-sec yield 7.0 7.1 7.1 7.1 - Employee exp 7,165 7,237 8,105 9,078 Company - Depn /amortisation 665 705 748 792 Op. metric assump. (%) - Other opex 7,035 7,091 7,747 8,462 Yield on advances 9.8 9.7 9.6 9.5 Preprovision profit 128,420 136,939 145,991 152,417 Cost of funds 8.2 8.2 8.1 8.0 Profit on sale of invst. 12,124 35,238 20,000 23,000 Net interest margins 3.0 2.7 2.6 2.5 Provisions 9,350 59,131 9,639 11,830 Profit on sale of invst. 12,124 35,238 20,000 23,000 Profit Before Tax 131,194 113,046 156,352 163,588 Dividend income 11,306 13,228 15,477 18,108 Less: Provision for Tax 34,863 25,813 34,767 36,341 Employee cost growth 8.0 1.0 12.0 12.0 Profit After Tax 96,331 87,233 121,586 127,247 Other opex growth 10.0 10.0 10.0 10.0 Extraordinaries - 90,198 - - Interest on ZCBs 7,406 7,406 7,406 7,406 Reported Profit 96,331 177,431 121,586 127,247 Tax rate (%) 26.6 22.8 22.2 22.2 Shares o /s (mn) 1,721 1,726 1,730 1,735 Balance sheet assumption (%) Basic EPS (INR) 56.0 50.5 70.3 73.3 Dividend payout 43.6 18.5 46.5 46.5 Diluted shares o/s (mn) 1,721 1,726 1,730 1,735 Disbursement growth 16.0 7.0 4.0 14.0 Adj. Diluted EPS (INR) 56.0 50.5 70.3 73.3 Repayment/prepay. rate 37.3 36.6 36.0 35.5 Dividend per share (DPS) 21.0 16.4 28.1 29.3 Ind. loans/total loans 70.0 70.0 70.0 70.0 Dividend Payout Ratio(%) 43.6 18.5 46.5 46.5 Gross NPLs 0.8 1.2 1.4 1.7

Sell-downs to HDFC Bank 250,000.0 241,270.0 265,397.0 291,936.7 Growth ratios (%) Year to March FY19 FY20 FY21E FY22E Revenues 19.6 20.5 (2.5) 6.1 NII growth 13.0 4.7 5.7 3.2 Opex growth 55.2 1.1 10.4 10.4 PPP growth 10.1 6.6 6.6 4.4 Provisions growth 105.5 532.4 (83.7) 22.7 Adjusted Profit 13.6 (9.4) 39.4 4.7

Operating ratios Year to March FY19 FY20 FY21E FY22E Yield on advances 9.8 9.7 9.6 9.5 Yield on assets 9.7 9.4 9.4 9.3 Cost of funds 8.2 8.2 8.1 8.0 Net interest margins 3.0 2.7 2.6 2.5 Spread 1.5 1.2 1.2 1.4 Cost-income 9.6 8.0 9.1 9.5 Tax rate 26.6 22.8 22.2 22.2

4 Edelweiss Securities Limited HDFC

Balance sheet (INR mn) Sanctions and disbursements As on 31st March FY19 FY20 FY21E FY22E Year to March FY19 FY20 FY21E FY22E Share capital 3,443 3,452 3,461 3,470 Sanctions (INR mn) 2,668,891 3,042,536 3,590,193 4,272,329 Share premium account 206,368 201,661 196,955 192,250 Disbursements (INR mn) 2,043,186 2,186,209 2,273,658 2,591,970 Reserves & Surplus 563,744 759,680 825,948 900,304 Disb. to sanction ratio 76.6 71.9 63.3 60.7 Net worth 773,555 964,794 1,026,365 1,096,023 Disbursements growth (%) 16.0 7.0 4.0 14.0 Deposits 1,055,989 1,214,388 1,396,546 1,606,028 Sanctions growth (%) 19.0 14.0 18.0 19.0 Secured loans 2,399,635 2,606,149 2,907,699 3,383,262

Unsecured loans 201,512 215,475 235,619 265,871 RoE decomposition (%) Others 2,399,635 2,524,731 2,675,711 2,959,426 Year to March FY19 FY20 FY21E FY22E Total liabilities 4,430,691 4,919,388 5,334,240 5,927,347 Net int. income/assets 3.0 2.7 2.6 2.5 Loans 4,046,762 4,509,373 4,894,259 5,456,831 Non int. income/assets 0.5 0.5 0.5 0.5 Investments 462,404 487,310 514,246 543,401 Invst. profits/Assets 0.3 0.8 0.4 0.4 Total current assets 86,005 88,377 88,824 91,701 Net revenues/assets 3.8 4.0 3.5 3.4 Total Current Liab 147,666 148,753 146,023 147,327 Operating expense/assets 0.4 0.3 0.3 0.3 Net current assets (61,661) (60,376) (57,199) (55,626) Provisions/assets 0.2 1.3 0.2 0.2 Fixed assets 6,372 6,117 5,820 5,477 Taxes/assets 0.8 0.6 0.7 0.6 Other Assets (23,186) (23,036) (22,886) (22,736) Total costs/assets 1.4 2.1 1.2 1.2 Total assets 4,430,691 4,919,388 5,334,240 5,927,347 ROA 2.3 1.9 2.4 2.3 Loan growth 12.6 11.4 8.5 11.5 Equity/assets 16.7 18.5 19.4 18.8 Deposit growth 13.6 13.7 14.1 14.7 ROAE (%) 13.9 10.0 12.2 12.0 EA growth 15.9 11.0 8.4 11.1

Capital adequacy 19.2 18.7 18.2 17.7 Valuation parameters

Year to March FY19 FY20 FY21E FY22E Adj. Diluted EPS (INR) 56.0 50.5 70.3 73.3 Y-o-Y growth (%) 10.6 (9.7) 39.0 4.4 BV per share (INR) 449.4 559.0 593.1 631.7 Adj. BV per share (INR) 338.3 446.7 479.6 517.0 P/B (x) 4.0 3.2 3.0 2.9 Price/ Adj. Earnings (x 13.1 21.3 11.0 10.9 Price/ Adj. BV (x)* 1.7 1.3 1.2 1.1

Peer comparison valuation Diluted P/E (X) P/B (X) ROAE (%) Name FY21E FY22E FY21E FY22E FY21E FY22E HDFC 11.0 10.9 3.0 2.9 12.2 12.0 Aavas Financiers 33.0 24.9 4.3 3.7 14.1 16.0 LIC Housing Finance 4.8 4.2 0.7 0.6 14.9 15.3 Mahindra & Mahindra Financial Services 10.9 8.8 0.9 0.9 8.7 10.4 Muthoot Finance 14.1 12.5 3.2 2.7 25.3 23.6 REC 3.0 2.3 0.4 0.4 15.7 17.6 Shriram City Union Finance 3.2 2.8 0.5 0.4 17.4 16.9 Shriram Transport Finance 4.4 3.9 0.8 0.6 18.6 17.9 Median 2.4 2.1 0.3 0.3 13.1 12.6 AVERAGE 4.3 3.8 1.0 0.9 14.1 14.4 Source: Edelweiss research

5 Edelweiss Securities Limited Banking and Financial Services

Additional Data Directors Data Deepak S. Parekh Chairman Nasser Munjee Independent Director J. J. Irani Independent Director U. K. Sinha Independent Director Jalaj Ashwin Dani Independent Director Bhaskar Ghosh Independent Director V. Srinivasa Rangan Executive Director Renu Sud Karnad Managing Director Keki M. Mistry VC & CEO Ireena Vittal Independent Director

Auditors - B S R & Co. LLP *as per last annual report

Holding – Top10 Perc. Holding Perc. Holding Life insurance corp 4.67 Vanguard group 4.56 Invesco ltd 3.94 Republic of singapor 3.23 Blackrock 3.11 Oppenheimer holdings 2.96 Jpmorgan chase & co 2.93 Sbi funds management 2.67 Fmr llc 1.87 Fil limited 1.51

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available

*in last one year

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*in last one year

6 Edelweiss Securities Limited RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative reco reco risk reco reco Risk Aavas Financiers REDUCE SU M Bajaj Finserv REDUCE SU L HOLD SO M DCB Bank BUY SP M BUY SU M BUY SO L HDFC BUY SO L HDFC Bank BUY SO L ICICI Bank BUY SO L IDFC FIRST BANK HOLD SP L BUY SP M IndusInd Bank HOLD SO L LIC Housing Finance BUY SO M of India HOLD SP M Mahindra & Mahindra Financial Services BUY SP M Power Finance Corp BUY SP M Max Financial Services BUY SO L REC BUY SP M Muthoot Finance BUY SO M Shriram City Union Finance BUY SP M UNDER REVIEW SU M Shriram Transport Finance BUY SO M Repco Home Finance BUY SP M UNDER REVIEW SP M State BUY SO L

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

Banking and Financial Services

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected]

Aditya Narain

Head of Research [email protected]

Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services Aavas Financiers, AU Ltd, Axis Bank, Bajaj Finserv, Bank of Baroda, DCB Bank, Equitas Holdings, Federal Bank, HDFC, HDFC Bank, HDFC Life Insurance Company Ltd, ICICI Bank, ICICI Lombard General Insurance Company Ltd, IDFC FIRST BANK, IndusInd Bank, ICICI Prudential Life Insurance Company Ltd, Kotak Mahindra Bank, LIC Housing Finance, Max Financial Services, Multi Commodity Exchange of India, Mahindra & Mahindra Financial Services, Muthoot Finance, Punjab National Bank, Power Finance Corp, REC, Repco Home Finance, SBI Life Insurance Company Ltd, , Shriram City Union Finance, Shriram Transport Finance, Yes Bank

Recent Research

Date Company Title Price (INR) Recos

18 -Aug-20 Kotak Equity sanctity benchmark; 1,368 Buy Mahindra growth will be watched; Bank Post Conference Notes

18-Aug-20 Shriram Focus shifting from liability 679 Buy Transport availability to asset outcome; Finance Post Conference Notes 17-Aug-20 HDFC Life Sticking to a multi-pronged 590 Reduce Insurance approach; Post Conference Notes

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period * 1stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn 743 Reduce depreciate more than 5% over a 12-month period Market Cap (INR) 156 62 11 594

One year price chart 446 2,800

(INR) 297 2,500 149 2,200

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8 Edelweiss Securities Limited

HDFC

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Banking and Financial Services

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10 Edelweiss Securities Limited

HDFC

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