Buy HDFC; target of Rs 2250: ICICI Direct

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ICICI Direct's research report on HDFC

HDFC Ltd’s earnings were largely in-line, with PBT at Rs 3517 crore (up 19.7% YoY) vs. our estimate of Rs 3500 crore. However, lower than estimated tax rate of 19.1% enabled higher PAT growth of 39.2% YoY to Rs 2846 crore  The key highlight of the result was higher than expected credit traction of 21% YoY to Rs 359442 crore. This growth has been the highest in last several quarters. It was largely led by individual loan portfolio which increased by 23% YoY to Rs 251457 crore & accounted for 70% of the total. Non individual book grew by ~17% YoY. Asset quality improved as expected. GNPA ratio stood at 1.11% (GNPA - Rs 4019 crore). NNPA remained nil. The NPA in the individual book fell by 3 bps QoQ at 0.64% while that of the non-individual portfolio remained steady QoQ at 2.18%.  NII increased by 11% YoY to Rs 3064 crore. Reported NIMs were at expected levels of ~4% while spread was steady at 2.29%. Full year FY18 PAT was at  Rs 12164 crore vs. Rs 7443 crore in FY17 Consolidated PAT for Q4FY18 was at Rs 3961 crore (up 29% YoY). Full year FY18 consolidated PAT stood at Rs 16255 crore.

Outlook

HDFC has commanded premium valuations over the years due to its consistent track record in earnings. Return ratios have remained healthy across economic cycles with RoE >20% & RoA ~2.2-2.5%. Going ahead, we expect PAT of Rs 11641 crore in FY20E (up 14.8% YoY). We have largely maintain our loan estimates and expect 17.2% CAGR to Rs 494049 crore by FY20E. Other parameters such as NIM/spread and asset quality are estimated to be stable, going ahead. We value the standalone business at 2.9x FY20E ABV. We maintain our SOTP based target price of Rs 2250/share and our BUY rating on the stock. HDFC remains a portfolio stock.

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