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.

Stock Market Update on HDFC for 1QFY2012

Stock Market 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.

Result Update on HDFC Bank for 4QFY2011

For 4QFY2011, HDFC Bank reported healthy 33.2% yoy growth in net profit to `1,115cr, in line with our estimate of `1,110cr. The bank continued to maintain healthy operating performance with strong profitability growth. We maintain our Accumulate recommendation on the stock.

Consistently healthy performance on all parameters: Overall business growth of the bank was healthy for 4QFY2011 despite a typical fourth quarter slowdown in advances. The bank was able to maintain its reported NIM at 4.2% despite the rising cost of funds for the system as a whole. Over the past few quarters, the bank has been witnessing a slowdown in saving account deposit growth, which came down to 27.2% in 4QFY2011 from 42.8% in 4QFY2010. Despite this, the bank’s CASA ratio remained the best in the industry at 52.7% (51% after adjusting for one-offs). The asset quality continued to improve substantially with slippages halving from 2.6% in FY2010 to 1.1% in FY2011 and provisioning expenses to average assets declining to 0.8% in FY2011 from 1.1% in FY2010. NPA coverage improved further to 82.5%, even without considering the strong floating  provisions (accounting for over 53.4% of provisioning expenses during the quarter). The bank currently has an outstanding floating provision pool of ~`730cr, building a cushion against future asset-quality pressures.

Outlook and valuation: At the CMP, the stock is trading at 3.2x FY2013E P/ABV, which is below our target multiple of 3.6x (benchmarked at ~25% premium to our Sensex target multiple). We believe HDFC Bank is well positioned for high qualitative growth, with CASA and cost-to-income ratio returning to pre-CBoP levels. In our view, with strong capital adequacy and healthy branch expansion, the bank is set to further gain credit and CASA market share accompanied by reduction in NPA provision costs. We maintain our Accumulate recommendation on the stock with a target price of `2,671.