Hold HDFC; target of Rs 700: Emkay

Emkay Global Financial Services has recommended hold rating on HDFC with a target of Rs 700, in its July 11, 2012 research report.

“HDFC Q1FY13 NII at Rs12.6bn and reported PAT – Rs10bn was largely inline with our estimates. However, adjusting for cross currency foreign translation loss of Rs4.5bn, NII growth would have remained flat yoy. Key highlights from the quarter were a) healthy 19.4% yoy growth in loan portfolio aided by 22.5% yoy growth in individual loans b) spreads at 2.27% sequentially and c) stable asset quality with adequate provisioning coverage. Operating profit at Rs14bn was up 19% yoy. With volatile capital market activities, profit on sale of investment stood at Rs200mn vs Rs869mn in Q1FY12. Asset quality continues to remain stable with GNPA at 0.79% and cumulative provisioning at Rs17.1bn (1.2% of loans). Loan growth at 19.4% yoy (5.2% qoq) was largely driven by 22.5% yoy (7.5% qoq) growth in individual loans. Growth in sanctions / disbursements too remained healthy at 17% yoy / 19.5% yoy respectively. On the liabilities front, the corporation has resorted to bonds and retail deposits to meet its borrowing requirement.”

“HDFC had resorted for higher share of term loan from banks in Q4FY12. However, with competitive bond rates, the management increased the share of bonds, debenture and deposits to 74% of total borrowings vs 71% in Mar’12 and 66% in June’11. As at Mar’12, 84% of assets and 75% of liabilities were on floating rate basis. Capital infusion in Q2FY13 via conversion of warrants, will enable HDFC retire high cost borrowings. Non-int income at Rs2.8bn was down 6% yoy and was dragged by lower trading gains. Growth in fee income too remains lower at 8% yoy. With volatile capital market activities, profit on sale of investment stood at Rs200mn vs Rs869mn in Q1FY12. Cost-income continues to remain at healthy sub-10% levels.”

“We continue to prefer housing finance space over banks in the mortgage business given their edge on sector expertise, asset quality controls and pricing power. HDFC has delivered another steady quarter with healthy 20% disbursement growth and robust 23% yoy growth in individual loans. Asset quality too remains comfortable with adequate provisioning. We expect the mortgage giant to report 19% CAGR in loan portfolio over FY12-14E. Margins are likely to remain stable at 3.2% range and would off-set credit cost requirement over FY13-14E thereby ensuring RoA in excess of 2.5%. We roll our estimates to FY14. However, current valuations leave limited room for upside. Maintain HOLD with target price of Rs700,” says Emkay Global Financial Services research report.

Non-Institutions holding more than 90% in Indian cos

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