RESULT UPDATE HDFC Steady, but not invulnerable India Equity Research| Banking and Financial Services COMPANYNAME HDFC posted in-line Q1FY21 core performance. However, higher dividend EDELWEISS 4D RATINGS income led to a PAT beat. GNPL came down marginally to 1.87% (1.99% in Absolute Rating BUY COMPANYNAME FY20). It made additional provisions for covid-19 (INR4bn), keeping credit Rating Relative to Sector Outperform cost elevated. Moratorium loans were ~22% (27% earlier). Individual loans Risk Rating Relative to Sector Low moratorium quantum at 16.6% was higher than expected for its salaried, Sector Relative to Market Overweight metro/urban-oriented customer base in the ‘safest retail asset’, in contrast to COMPANYNAME most large banks’ commentary. However, we believe the divergence MARKET DATA (R: HDFC.BO, B: HDFC IN) stems from approach and not the underlying economics. Given momentous CMP : INR 1,805 challenges to real estate, non-individual loans need monitoring. We provide Target Price : INR 2,100 no benefit of expected easing to core spreads as prime mortgage rates have 52-week range (INR) : 2,500 / 1,473 COMPANYNAME followed SBI’s MCLR downwards swiftly. A relatively bounded worst-case Share in issue (mn) : 1,734.6 outcome on asset quality, liability strength and post-crisis market share gain M cap (INR bn/USD mn) : 3,141 / 36,441 potential help. We: (i) trim our core multiple to 2.3x (from 2.5x) to reflect Avg. Daily Vol.BSE/NSE(‘000) : 4,028.0 eroded ‘equity certainty’ & the evident structural change in the erstwhile secular nature of mortgage profitability and (ii) revise subsidiaries valuation SHARE HOLDING PATTERN (%) (apropos coverage transfer), leading to revised TP of INR2,100 (earlier Current Q4FY20 Q3FY20 INR1,850). Maintain ‘BUY’. Cyclical stress on developer loans remains the Promoters * - - - key risk to the investment thesis. MF's, FI's & BK’s 18.5 18.0 16.7 FII's 70.2 70.9 72.7 Asset quality: Headline steady, moratorium high Others 11.3 11.1 10.6 The troubles of the real estate segment have finally arrived at the bellwether’s doorstep. * Promoters pledged shares : NIL (% of share in issue) While we do anticipate some pressure in the non-individual segment, HDFC has historically managed risk effectively—a trend we expect to sustain. Moreover, PRICE PERFORMANCE (%) provisioning stock of 2.44% of loans (47% in stage-3, 1.6% in stage 1&2) lends comfort. EW Banks and Stock Nifty Financial Services Index Growth supported by non-individual segment Individual growth came off at 10.4% YoY/flat QoQ. However, higher corporate growth 1 month 7.0 8.3 10.3 (>15% YoY/~10% QoQ) led to overall growth of ~12% YoY. Meanwhile, higher liquidity 3 months 8.7 20.7 10.7 drag impacted NIM, restricting NII growth to 10%. We believe gains from slackened 12 months (19.0) (12.0) (30.2) competiton and sustained, but not improving, spreads will support revenue momentum. Outlook and valuation: Relatively better off; maintain ‘BUY’ HDFC’s relatively safer assets provide comfort and covid-19 does deepen its competitive Santanu Chakrabarti moats. However, margin benefits from lower rates are not likely to accrue. Finally, the +91 (22) 4342 8680 real estate crisis has now touched HDFC too. We maintain ‘BUY/SO’. [email protected] Financials (INR mn) Prakhar Agarwal +91 22 6620 3076 Year to March Q1FY21 Q1FY20 Growth (%) Q4FY20 Growth (%) FY20E FY21E FY22E [email protected] Net revenue 38,670 33,942 13.9 38,755 (0.2) 1,51,973 1,62,591 1,70,750 Net profit 30,515 32,031 (4.7) 22,325 36.7 1,77,431 1,21,586 1,27,247 Anisha Khandelwal +91 22 6623 3362 Dil. EPS (INR) 17.6 18.5 (5.0) 12.8 37.5 50.5 70.3 73.3 [email protected] Adj. BV (INR) 446.7 479.6 517.0 Price/ Adj book (x) 1.3 1.2 1.1 Price/ Adj. earnings (x) 21.2 10.9 10.9 July 30, 2020 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited Banking and Financial Services Table 1: Q1FY21 results: Key takeaways (INR mn) Q1FY21 Q1FY20 YoY (%) Q4FY20 QoQ (%) Comments Net revenues 38,670 33,942 13.9 38,755 (0.2) NII affected due to drop in NIMs Expenses 15,608 12,425 25.6 15,842 (1.5) Additional provisions of INR4bn made on account of Covid-19 Depreciation 346 292 18.5 432 (19.7) Profit before extraordinary 22,716 21,225 7.0 22,481 1.0 items Profit on sale of investments 13,352 18,626 (28.3) 4,443 200.5 Profit before tax 36,068 39,851 (9.5) 26,924 34.0 Tax expense 5,553 7,820 (29.0) 4,599 20.7 Profit after tax 30,515 32,031 (4.7) 22,325 36.7 EPS (INR) 17.6 18.5 (5.0) 12.8 37.5 Key Metrics (INR bn) Loan book 4,657 4,166 11.8 4,509 3.3 Individual 3,285 2,975 10.4 3,259 0.8 Individual loan book growth was affected due to nation wide lockdowns Non-individual 1,372 1,191 15.2 1,250 9.8 GNPA (%) 1.9 1.3 2.0 Asset quality improved as moratorium delayed recognition Individual 0.9 0.7 1.0 Non-individual 4.1 2.7 4.7 Source: Company, Edelweiss research Table 2: Slippages curtailed as moratorium delayed recognition As per IND AS (INR bn) Q2FY20 Q3FY20 Q4FY20 Q1FY21 Gross stage 3 67 70 103 102 ECL provision stage 3 29 34 49 48 Net stage 3 38 36 54 54 Coverage ratio % stage 3 43.2 49.0 47.5 47.5 Gross stage 1 & 2 4,197 4,340 4,396 4,543 ECL provision stage 1 & 2 44 65 61 74 Net stage 1 & 2 4,153 4,275 4,335 4,469 ECL provision % stage 1 & 2 1.1 1.5 1.4 1.6 Source: Company 2 Edelweiss Securities Limited HDFC Chart 1: Loan growth softer as lockdown affected disbursement… 25.0 20.0 15.0 (%) 10.0 5.0 0.0 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q3FY20* Q1FY19* Q2FY19* Q3FY19* Q4FY19* Q1FY20* Q2FY20* Q4FY20* Q1FY21* Overall growth Ind. growth Non-ind. growth Chart 2: …which in turn hurt revenue momentum 23.0 19.0 15.0 (%) 11.0 7.0 3.0 Q2FY18 Q1FY18 Q3FY18 Q4FY18 Q3FY19* Q1FY19* Q2FY19* Q4FY19* Q1FY20* Q2FY20* Q3FY20* Q4FY20* Q1FY21* NII growth *As per IND-AS so not strictly comparable Chart 3: Borrowings profile: incremental resources deposits and term loans 1.0 11 0.8 49 47 47 45 43 43 57 56 57 54 50 0.6 54 (%) 0.4 32 33 30 29 30 31 32 30 31 29 30 0.2 35 21 21 23 22 23 25 24 13 13 15 16 0.0 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Bonds, debentures Deposits Term loans Source: Company 3 Edelweiss Securities Limited Banking and Financial Services Chart 4: Asset quality remained stable due to standstill 5.0 4.0 3.0 (%) 2.0 1.0 0.0 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Individual Non-individual Overall book Source: Company Table 3: SoTP valuation Value of AUMs/book Value of HDFC's /earnings business HDFC interest Value per Method (INR mn) Multiple (x) (INR mn) holding(%) (INR mn) share (INR) HDFC core business (A) Price to core BV 7,69,698 2.3 17,70,305 100.0 17,70,305 1023 HDFC Bank Market Cap 73,29,551 21.3 15,59,728 901 HDFC Life Insurance Target Mcap 10,70,176 51.5 5,50,820 318 Bandhan Bank Market value 5,44,600 10.0 54,460 31 HDFC General Insurance Economic profit multiple4,837 20.0 96,737 50.8 49,143 28 Asset management Market Cap 5,12,950 52.8 2,70,684 156 Venture Capital % of AUMs 96,196 10.0 9,620 100.0 9,620 6 Value of subs (B) 24,94,454 1,442 Total Value (A+B) 42,64,759 2,465 Total Value (post holdco disc of 15%) 36,25,045 2,095 Source: Edelweiss research Note: TP rounded off to 2,100 4 Edelweiss Securities Limited HDFC Financial snapshot (INR mn) Year to March Q1FY21 Q1FY20 % change Q4FY20 % change FY20 FY21E FY22E Interest income 113,842 111,266 2.3 115,293 (1.3) 441,661 481,354 526,530 Interest exp 78,171 77,393 1.0 76,618 2.0 312,782 345,099 385,853 Net int. inc. (INR mn) 35,672 33,874 5.3 38,675 (7.8) 128,880 136,255 140,677 Dividend income 2,982 11 28,302.9 21 14,238.0 13,228 15,477 18,108 Others 4,880 5,795 (15.8) 3,071 58.9 9,418 10,412 11,518 Net income from ops 43,534 39,679 9.7 41,767 4.2 151,526 162,144 170,303 Other income 2,998 69 4,264.5 80 3,638.7 447 447 447 Net revenues 38,670 33,942 13.9 38,755 (0.2) 151,973 162,591 170,750 Other expenses 15,608 12,425 25.6 15,842 (1.5) 73,459 25,491 29,370 Depreciation 346 292 18.5 432 (19.7) 705 748 792 PBT before extraor.