Stock Market Update on HDFC for 1QFY2012

StockMarket Update on HDFC for 1QFY2012 with a Neutral recommendation

For 1QFY2012, HDFC’s standalone net profit grew by healthy 21.6% yoy (down 26.0% qoq). Although the spreads for 1QFY2012 witnessed a marginal decline, the asset quality continued to be stable. We recommend Neutral on the stock.

Strong sequential loan growth, asset quality remains stable: For 1QFY2012, HDFC’s loan book grew strongly by 22.2% yoy and 6.0% qoq to `124,168cr. Approvals grew by 22.0% yoy to `19,500cr, while disbursements grew by 20.0% yoy to `13,000cr. On a qoq basis, approvals declined by 12.1%, while disbursements witnessed a decline of 29.6% mainly because of seasonality and a high base. The bank’s NII increased modestly by 11.3% yoy, as rising interest rates increased the cost of funds for the company. The spread on loans over the cost of borrowings stood at 2.30% for 1QFY2012 compared to 2.34% for 1QFY2011. The asset quality continued to be stable during 1QFY2012, with gross NPA ratio rising by 6bp sequentially to 0.83%. On a six-month overdue basis, the gross NPA ratio stood at 0.55%.

Outlook and valuation: At the CMP, HDFC’s core business (after adjusting `225/share towards value of the subsidiaries) is trading at 4.53x FY2013E ABV of `107.5 (including subsidiaries, the stock is trading at 4.46x FY2013E ABV of `159.7). We expect HDFC to post a healthy PAT CAGR of 17.8% over FY2011–13E. However, considering that the stock is currently trading at 5.2x one-year forward P/ABV (compared to its median of 4.6x over the last five years) and at a 61.4% earnings premium to the Sensex (compared to an average of 43.1% over the last five years), we consider the stock to be richly valued at its CMP and, hence, recommend Neutral on the stock.