Reduce HDFC; target of Rs 700: Emkay

Emkay Global Financial Services is bearish on Housing Development Finance Corporation (HDFC) and has recommended reduce rating on stock with a target of Rs 700 in its October 23, 2012 research report.

“HDFC Q2FY13 NII at Rs12.9bn (+11.2% yoy) came in lower than our / street estimates of Rs13.7bn-Rs14.2bn. Calc spreads declined 28bps sequentially on back of lower yields and higher costs as HDFC has replaced zero coupon debentures with domestic bonds and accounted for Rs260mn of interest costs on the same. However, even adjusted for the same, spreads were still under pressure. Reported spreads, have remained flat sequentially at 2.27%. However, aided by higher non-interest income (primarily being dividend) and investment gains (ie profit on sale of investments) at Rs941mn, reported PAT at Rs11.5bn (+18.6% yoy) was largely inline with estimates.”

“Loan growth (adjusted for sale to HDFC Bank) continues to remain buoyant at 22% yoy / 5% qoq aided by growth across segments – retail (24% yoy) / non-individual (+19% yoy). Growth in sanctions / disbursements too remained healthy at 18% / 21% for H1FY13. On the liabilities front, mgmt has consciously reduced its dependence on bank term loans over the past two-quarters. Asset quality continues to remain healthy with GNPA at 0.77% and cumulative provisioning at Rs17.5bn (1.1% of loans). GNPA segment-wise stood at - individual (0.65%) and non-individuals (0.89%).”

“HDFC Q2FY13 results were a tad weaker on both NII and fee income front. Going forward, the competitive intensity is likely rise and hence we believe that the NII growth is likely to slow down further to 14-15% for H2FY13 vs. 18% for H1FY13. With pressure on fee income too, we expect the profit growth to also slow down to 13-14% for the same period. We have left our earnings estimates unchanged as we had factored in cost due to replacement of zero coupon debentures in our estimates earlier. With impending risks to earnings growth we assign reduce rating to the stock while maintaining TP of Rs700,” says Emkay Global Financial Services research report.

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