Hold HDFC; target of Rs 1056: ICICIdirect

ICICIdirect.com`s research report on HDFC“HDFC Ltd has witnessed large speculative news flows on its merger with HDFC Bank, driving stock prices to a new high. However, our interaction with the management provides details on “Merger - Not a near term probability”. Recent RBI norms on SLR, CRR relief on infrastructure bonds are not beneficial enough to push the merger ahead though it is eventually the course to be followed.” “We believe, post management discussion, infrastructure bonds (minimum seven years) in small volumes are possible in the near term. However, placement of a large quantum when inter-bank participation is disallowed remains a challenge. The nature of these bonds is unsecured, uninsured, long term and needs higher coupon to support. Only a few banks have placed the bonds till now. Hence, placing bets on infra bonds replacing huge borrowings of Rs 187000 crore seems an exaggeration. HDFC Standard Life is expected to be listed soon after the Parliament approves the FDI hike to 49%. However, clarity on the sub break-up of the increased 23% stake (full FDI or FDI+FII/NRI) also remains crucial. It reported a profit of Rs 730 crore in FY14 and also offered 5% maiden dividend to the parent in FY14. Gross premium also grew at 7% YoY to Rs 12063 crore with an individual business margin of 26%. Accordingly, we have raised our margin expectation and valuation multiple valuing the entity at ~Rs 14000 crore (FY16E). It adds Rs 65/share to HDFC’s TP.” “HDFC has commanded premium valuations over the years due to its consistent track record in earnings and business growth. Return ratios have remained healthy across economic cycles with RoE >20% and RoA >2.5%. We expect this to be maintained over FY14-16E with stable asset quality. The consolidated PAT as on FY14 stood at Rs 7948 crore with subsidiaries contributing 32%. Even consolidated RoEs have been healthy at ~21%. Over FY14-16E, we expect standalone earnings CAGR of 14% to Rs 7013 crore. We revise our SOTP based target price to Rs 1056 from Rs 1000 earlier. We value the standalone housing finance business at 3x FY16E ABV (2.8x earlier) and maintain our HOLD recommendation,” says ICICIdirect.com research report.

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