Buy HDFC; target of Rs 2050: ICICI Direct

ICICI Direct's research report on HDFC

Net interest income declined ~6% YoY to Rs 2685.6 crore, due to higher interest expenses. Margins declined ~10 bps QoQ to 3.2%, while spread remained broadly steady at 2.26% Overall credit growth came in slower compared to the previous run rate at 13.1% YoY to Rs 385520 crore, on the back of declining individual & corporate growth. Individual loan portfolio increased ~15% YoY to Rs 270972 crore and accounted for 70% of total loan book. Trajectory of corporate loans fell to single digit at 7.3% YoY Asset quality moderated slightly QoQ. GNPA ratio was at 1.22% (GNPA - ~Rs 4703 crore) vs. 1.13% in Q2FY19, led by slippages in developer loan book Non-performing loans in the non-individual portfolio rose 28 bps QoQ to 2.46% while individual portfolio stayed steady QoQ at 0.68% PAT came in lower at Rs 2113.8 crore vs. Rs 2467 crore in Q2FY19, down 14% on the back of lower NII & credit growth.

Outlook

HDFC Ltd, due to its superior fundamentals, commanded premium valuations compared to its peers. The company has maintained superior return ratios across economic cycles with RoA at ~2-2.5% & credit growth at 20% CAGR since FY07. Going ahead, we expect PAT of Rs 9344 crore in FY20E. With moderation in credit growth seen in the past quarter, we alter our loan estimates and expect 14.2% CAGR to Rs 467610 crore by FY20E. Other parameters such as NIM/spread and asset quality are expected to moderate, going ahead. We value the standalone business at 2.5x FY20E ABV. We maintain our SOTP (15% discount) based target price at Rs 2050/share. We maintain our BUY rating on the stock. With its leadership position intact in the housing finance space, in the current environment, we expect the company to be able to further gain market share and deliver a strong operating performance.

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