Analyst Corner| HDFC: Maintain ‘buy’ with target price of Rs 3,340

HDFC’s 3QFY21 profit of Rs 29 bn (-65% YoY on high base from Gruh’s sale) led by better topline. The two key positives were strong disbursement growth of 26% and largely stable asset quality – collections 98%, restructuring 1%, stage-3 2.3%, buffer provision at 1.2%. HDFC is better placed to leverage housing demand & potential construction-financing as it gains from its funding franchise. Loan growth can improve from 9-10% now to 15% over FY22-23. Buy.

Pick-up in retail demand; slight lag in loan-growth pick-up. The key highlight for 3Q was pick-up in retail disbursement to 26% YoY vs. decline of 5% YoY in 2Q. This reflects a combination of improved housing sales and HDFC’s ability to raise resources/ run-down surplus liquidity to capitalise on demand. We understand that demand has come across completed and under-construction projects and momentum remains strong. Even with some price inflation, demand can hold up. During 3Q, retail AUMs rose by 10% YoY and we believe that growth can improve further in 1-2 quarters as new disbursements cover-up for the drag from repayment. Overall AUMs rose by 9% YOY and loans rose by 10% YoY. Stress manageable & buffer provisions reasonable. HDFC saw stage-3 loans (including proforma) being largely stable around 2.3% – although adjusted for write- offs it could have been higher at 2.45%. Collections improved further to 98% and HDFC restructured only 0.9% of AUM – 0.3% of retail loans and 2.8% of corporate loans. Part of the ECLG loans have also been held in Stage-2 loans- hence this segment rose from 5% of loans to 7%.

We believe that with strong momentum on housing-sales, many developers would have deleveraged balance sheet – risk can be in commercial exposures (6% of total). HDFC has 1.2% of loans held in buffer provisions and these can insulate earnings (company utilised part of such provision in 3Q as well). Funding remains strong and topline growth drives upside.

The key positive in 3Q results was a strong core NII growth of 25% YoY/ 11% QoQ reflecting margin expansion on core-basis as well as benefit from capital raise. Maintain Buy. We raise estimates by 5-6% to factor in a better top line and lower provisions. We maintain our Buy rating with a target price of `3,340, including the value of mortgage lending business at 3x Dec-22 P/ABV.