CLSA retains buy on HDFC, raises EPS by 3% after Ergo stake sale

With maintaining buy rating and target price of Rs 1,440 on HDFC, CLSA says it has raised earnings per share (EPS) by 3 percent after the housing finance company completed the sale of 23 percent stake in HDFC Ergo General to its European partner. Further upsides may arise from the sale of 10 percent stake in the life insurance subsidiary (IPO planned), it says.

Post the transaction, HDFC's stake will decline to 51 percent and the rest will be owned by Ergo International.

The brokerage says the deal will lead to a pre-tax profit of Rs 920 crore and post-tax profit of Rs 730 crore, adding the management plans to utilise 30 percent of pre-tax profit (Rs 280 crore) to build provisions for any unexpected risk (HDFC has built provisions of about 30 bps of loans with recent stake sales in insurance subsidiaries).

Meanwhile, HDFC Ergo also acquired 100 percent stake in L&T General Insurance from L&T for Rs 550 crore in cash.

CLSA expects the transaction to take 8-11 months to be consummated and believes promoters (HDFC and Ergo) may infuse funds in the company for this acquisition.

According to the brokerage, this acquisition can lift HDFC Ergo’s market share by 50 basis points to +4 percent and improve its ranking from 4th to 3rd largest private player.

It feels key upside will arise from improvement in profitability of L&T General Insurance given its high combined ratio of 136 percent against 105 percent for HDFC Ergo.Its core business should see an uptick led by a pick-up in loan growth, which along with its high return on equity (RoE) will support higher compounding of the book, says the brokerage.

At 10:19 hours IST, the scrip of Housing Development Finance Corporation was quoting at Rs 1,254.65, down Rs 0.85, or 0.07 percent on Bombay Stock Exchange.Posted by Sunil Shankar Matkar