HDFC - BUY. Company Report September 21, 2010

Transcription

1 Company Report September 21, 21 HDFC - BUY CMP Rs76, Target Rs787 Sector: NBFC Sensex: 19,96 CMP (Rs): 76 Target price (Rs): 787 Upside : Week h/l (Rs): 78 / 39 Market cap (Rscr) : 12,991 6m Avg vol ( Nos): 3,266 No of o/s shares (mn): 1,458 FV (Rs): 2 Bloomberg code: HDFC IN Reuters code: HDFC.NS BSE code: 51 NSE code: HDFC Prices as on 2 Sep, 21 Shareholding pattern March '1 Promoters Institutions 12.7 Non promoter corp hold Public & others 77.3 Performance rel. to sensex 1m 3m 1yr HDFC LIC Housing SBIN ICICI Bank Share price trend 15 HDFC Sensex 5 Sep-9 Dec-9 Apr-1 Jul-1 HDFC has transformed itself from a pure mortgage player to a financial services conglomerate that derives 38% of its value from non-mortgage businesses. Superior credit rating and access to retail deposits have helped the company borrow at competitive costs and maintain stable 2%+ spreads. Further, low operating costs and adequate check on credit quality have resulted in healthy growth and in turn best-in-class returns ratio. With immense potential in mortgage business, we believe HDFC would be the key beneficiary. The stock has underperformed its peers YTD and currently trades at attractive valuations. BUY. Low mortgage-gdp ratio provides room for ample growth Mortgage-GDP ratio in India remains low at 7% clearly depicting the huge under-penetration. While real estate prices are near their peak, we believe, that a) rising levels of income and higher affordability, b) easy availability of finance, c) urbanization and evolution of nuclear family concept, d) soft interest rate regime and e) tax incentives under the Income Tax Act would drive growth further. HDFC, with a dominant 16%+* market share in this space, will be the key beneficiary of the growth. Spreads remain intact despite volatile interest rate regime HDFC has a diversified loan portfolio comprising individuals (~65% of total loans) and corporates. Superior credit rating, access to retail deposits and adequate check on ALM portfolio have enabled the company maintain its spreads at 2%+ for past several quarters despite gyration in interest rate. While the central bank has raised its key policy rates by over bps in the past five months, we believe that the company will be able to maintain its spreads at current levels. Value unlocking in subsidiary to drive valuations further HDFC has reportedly been planning an IPO for its life insurance business. While uncertainties over listing guidelines prevail, we believe that the process would complete by end-fy12. We expect valuations to re-rate significantly from current levels given a) immense potential in mortgage business, b) stable spreads, c) bestin-class returns ratio, d) minimal concerns on asset quality e) value unlocking in subsidiary and f) foray into educational loan space. Financial summary Y/e 31 Mar (Rs m) FY9 FY1A FY11E FY12E Total operating income 35,852 42,978 5,718 61,759 yoy growth Operating profit (pre-provisions) 32,69 39,74 46,619 56,665 Net profit 22,825 28,265 33,62 4,8 yoy growth (6.3) Research Analyst Aalok Shah research@indiainfoline.com EPS (Rs) BVPS (Rs) P/E (x) P/BV (x) ROE CAR Tier I

2 Investment rationale Largest mortgage player with ~US$21bn of loan portfolio Over three decades of experience catering to ~3.5mn customers. Pro-active measure announced by RBI ensured adequate check on asset quality also shift in focus towards affordable housing projects restored faith in mortgage business With increasing credit demand and rising ALM mismatch, bank s are likely to gradually phase out of this space Mortgage industry to witness steady 2%+ growth rate Loan sanctions and disbursements to witness 24% CAGR and 23% CAGR over FY1-12E Mortgage business to witness steady 2%+ growth HDFC with a loan portfolio of ~US$21bn is the largest mortgage player in India enjoying healthy 16%+* market share. With nearly three decades of presence in mortgage business coupled with strong management leadership, the company has catered to the needs of ~3.5mn customers. Despite the recent down-turn, loan portfolio for the company grew at a stupendous 26% CAGR over past decade (21% CAGR over FY7-1) clearly depicting potential in the mortgage business. Also, pro-active measures initiated by the Reserve Bank of India in the form of stringent provisioning and lending norms to the sector and conscious steps undertaken by the real estate players in terms of affordable housing and timely completion of projects has restored faith in mortgage business in India. The soft interest rate regime, tepid credit growth during the initial period of FY9 and complying to priority sector norms had attracted banks attention to mortgage business. Availability of low-cost of funds (in the form of CASA deposits), rich presence and strong brand name helped banks increase their housing loan portfolio and improve market share, which was earlier dominated by HFCs HDFC and LIC Housing Finance. While the competition in the mortgage space has intensified, in our view, the ALM mismatch in the mortgage portfolio and improving credit demand across other sectors will enable banks to gradually phase out of this space. Despite the sharp surge in real estate prices, with increasing levels of affordability and higher income levels, we expect mortgage industry to witness steady 2%+ growth rate. HDFC, with a large presence and strong brand recall is expected to be the key beneficiary of this growth. We expect HDFC to report healthy 24% CAGR in sanctions and 23% CAGR in disbursements over FY1-12E. Loan portfolio (adjusted for sale to HDFC Bank) is expected to grow at 23% over FY1-12E. Trend in loan growth Expect 23% CAGR over FY1-12E 35. Sequential loan growth HDFC, LICHF and SBI 15. HDFC SBIN LIC FY FY1 FY2 FY3 FY4 FY5 FY6 FY7 FY8 FY9 FY1 FY11E FY12E FY9 FY9 FY9 FY1 FY1 FY1 FY1 FY11 Company Report 2

3 Diversified loan mix individuals (65%) and corporates (35%) Avg LTV at 67%, near 6-7 working days and ~Rs1.8mn of average loan size makes HDFC a preferred mortgage player initiatives in form of housing campaign and property fairs help mark presence in highly intense business Diversified loan mix - A key advantage HDFC has a diversified loan portfolio comprising individuals (~65% of total loans), corporates (~3%) and others. With average loan-tovalue ratio at 67%, lower processing time (typically 6-7 working days as against 2-3 weeks in case of banks) and ~Rs1.8mn of average loan size, HDFC is one of the preferred mortgage player amongst individual borrowers. Also, initiatives in the form of housing campaign HDFC because every family needs a home and through Property fairs, the company has maintained its rich presence in the highly intensified mortgage space. With regulator cap on lending by banks to real estate players, HDFC has been catering to the increase needs of the segment. Lending to this segment has remained at ~3%+ of total loans for past several quarters. Further, ~4% of total lending is towards developers and is secured by charge on real estate. We expect mortgage demand to remain strong on back of urbanization, improving income levels and affordability, nuclear family concepts and tax incentives. Trend in loan sanctions Trend in loan disbursements (Rs bn) Loan approvals % grow th (RHS) Loan disbursements (Rs bn) % grow th (RHS) FY8 FY9 FY1 FY11 FY8 FY9 FY1 FY11 Sequential loan book break down Loan mix to remain at current levels Individuals Corporate Others Individuals Corporate Others FY9 FY1 FY11 FY7 FY8 FY9 FY1 FY11E FY12E Company Report 3

4 Access to retail deposits and superior credit rating have been a stand-out point for the company Share of retail deposits has increased from 19% as at end FY8 to FY11 Sequential borrowing mix Healthy borrowing profile; reliance on retail deposits on rise Superior credit rating, strong brand recall and access to retail deposits has been a stand-out point for the company. The current benign interest rate regime had enabled HDFC to borrow at competitive cost. Also the fund raising programme to the tune of Rs43bn via warrants and NCD issuance during FY1, in our view, will support the balance sheet growth. Over the past few quarters, the company has increased its reliance on retail deposits. The share of retail deposits in total borrowing profile has increased from 19% as at end FY8 to near 24% as at end FY11. Going forward, we expect the borrowing mix to remain healthy Bonds, debentures, FCCBs (45%), retail deposits (25%) and term loans constituting the balance. Share of retail deposits on rise Term loans Bonds, debentures, FCCB & CPs Deposits Term loans Bonds, debentures, FCCB & CPs Deposits FY8 FY9 FY1 FY11 2 FY7 FY8 FY9 FY1 Spreads remain healthy at 2%+ despite gyration in interest rate environment ~79% of assets are floating in nature against ~78% of liabilities Spreads remain intact at 2%+ despite volatile interest regime Despite huge volatility in interest rate environment, HDFC has been able to maintain its spreads at 2%+ for past several quarters. This is commendable given that interest rates had witnessed huge gyration in past 6-7 quarters. Further, while RBI has raised its key policy rates by over bps in past five months, we expect spreads for the company to remain intact at 2%+ given its healthy reach, access to retail deposits and superior credit rating. Also ALM mismatch remains minimal as 79% of assets are floating base against 78% in case of liabilities. Spreads have remained intact despite volatile interest rates yr AAA bond (RHS) Spreads FY8 FY9 FY1 FY11 Source: Bloomberg, Company, India Infoline Research Company Report 4

5 Reach has expanded to 279 branches from 67 as at end FY ~94% of loans are originated through own channels C/Income ratio remain lowest amongst its peers Lowest C/Income ratio; leverage on in-house sourcing model HDFC, with over three decades of experience in mortgage business, has leveraged on its in-house loan sourcing model. From a mere 67 branches as at end FY, its reach has expanded to 279 branches catering to over 3.5mn customers. Currently, ~94% of the loans originated are through its own channels (3% - HDFC Bank, 46% - HDFC Sales, 18% - Direct walk-ins). This in-turn has resulted in lowest cost-to-income ratio. C/Income ratio has remained in low teens for past several quarters. Loan sourcing model - ~94% is in-house Direct w alkins, 18 Other DSA's, 6 HDFC Bank, 3 Trend in cost-to-income ratio HDFC Sales Pvt, 46 FY8 FY9 FY1 FY11 Asset quality remain intact owing to stringent provisioning norms Minimal concerns on asset quality, provisioning norms remain stringent Low income-to-installment ratio, concentration towards salaried individual and stringent provisioning norms had enabled HDFC to tide over the recent down-turn. While real estate prices had corrected by over 5% from their highest levels, GNPL at peak remained at only 1.2% levels. GNPL (9-days) since then has moderated to.9% levels between FY8-FY11. Despite ~3%+ concentration towards corporate and builders, we believe HDFC is best placed to capitalise on growth story in mortgage space in India. Asset quality remains under check 2. GNPL (18-days) (RHS) GNPL (9-days) FY8 FY9 FY1 FY11 Company Report 5

6 38% of SOTP valuation is derived from non-mortgage business 72.5% stake in HDFC Standard life, 74% stake in HDFC Ergo General insurance, 6% stake in HDFC AMC, 24% stake in HDFC Bank, 8.5% stake in HDFC venture capital and % stake in HDFC property venture Acquired 41% stake in Credila Financial services pvt ltd, with a view to foray into education loan space Core mortgage RoE remains high at average 34% over FY7-1 HDFC presence across all financial service verticals; foray into education loans space next on radar Over the past three decades, HDFC has transformed itself from a pure mortgage player to a financial services conglomerate that derives 38% of its value from non-mortgage businesses. The company has presence across the entire gamut of financial services including life and general insurance, venture capital including property ventures, asset management and bank. HDFC holds 72.56% stake in HDFC Standard Life (HDFC-SL), the second largest private player in life insurance business. Stake in general insurance business - HDFC Ergo General insurance remains high at 74%. With over Rs1tn of assets under management, stake in HDFC AMC is at 6%. The company has also vested interest in Bank with ~24% stake in HDFC Bank, the second largest private sector bank, % in HDFC property ventures and 8.5% in HDFC venture capital. Investment in subsidiaries constituted ~5% of total shareholder s fund as at end FY1. Further, with a view to foray into educational loan space, HDFC has acquired 41% stake Credila Financial Services Private Limited, a company that exclusively focuses on providing education loans. Core mortgage RoE at 3%+ (ex-investment in subsidiaries) Healthy loan growth with diversified loan mix, adequate borrowing profile, lowest cost-to-income ratio and check on asset quality, have resulted in superior returns ratio. Reported RoE has averaged at 24% levels for FY7-1. However, excluding investment in subsidiaries, core mortgage RoE has remained high at an average of 34% over similar period. Core mortgage RoE vis-à-vis reported RoE Core mortgage RoE RoE (RHS) 5 4 Invst. in subs. as % of shareholder s fund FY7 FY8 FY9 FY1 FY11E FY12E FY7 FY8 FY9 FY1 FY11E FY12E Company Report 6

7 Head to head with LICHF HDFC and LICHF enjoyed a dominant 55% market share in housing finance segment HDFC exposure to individual loans is at 6-65%. ~92% of business in case of HDFC is originated via in-house sources Average loan size in case of HDFC is at Rs1.5mn as against near Rs1.4mn in case of LICHF Prior to FY22, the housing finance space was dominated by HDFC and LICHF, cumulatively enjoying over 55% of the market share. However, since then, banks, primarily private banks had started capturing market share. The stringent provisioning policy and adequate credit appraisal norms have enabled HFCs maintain check on asset quality. GNPL for HDFC and LICHF remain comfortable at.89% and.92% respectively. Loan mix and distribution channel HDFC witnessed a moderate 15% yoy growth in loans during FY1. While, LICHF s exposure to individual loans has remained high at ~85-9% of total loans, in case of HDFC, this exposure is limited at 6-65%. The balance exposure in case of HDFC is towards corporate bodies. Further with 279 outlets, HDFC originates ~94% of loans via in-house sources. (HDFC Bank 3%, HDFC sales 46% and 18%- direct walk-ins). LICHF on other hand generates business through 1,48 DSAs, 7,85 LIC agents and 785 individual agents. The average loan size in case of HDFC stands marginally higher at Rs1.8mn as against Rs1.4mn in case of LICHF. Also LTV for HDFC is higher at an average 67% as against 5% in case of LICHF. Individual loan exposure by LICHF & HDFC. LIC HDFC 9 LIC share has seen significant traction* HDFC LIC Banking (RHS) FY3 FY4 FY5 FY6 FY7 FY8 FY9 FY1 FY11 FY7 FY8 FY9 FY1 4 Source: Companies, India Infoline Research Source: Companies, RBI, India Infoline Research *Incremental market share HDFC has started increasing its focus on retail deposits Funding mix HDFC in a better position Strong parentage had acted as a major source of finance for LICHF. Over the years, the company has resorted to raising funds via issue of non-convertible debentures and term loans from banks. While term loans from banks can be availed under the Priority sector window, interest cost attached to these instruments remains high. In case of LICHF, borrowings from debentures and term loans constitute ~82% of total borrowings. This is relatively less at 76% in case of HDFC. Borrowing mix LICHF HDFC of total borrowings FY9 FY1 FY9 FY1 Term loan Bonds, Deb and FCCB Deposits Source: Companies, India Infoline Research Company Report 7

8 Industry primer Huge demand-supply mismatch in the housing Demand for housing sector has gained significant traction since the beginning of second-half of FY1. Real estate prices had corrected sharply during the recent global downturn (28-9). However, with improvement in economic environment and stability over income levels, real estate activities have picked up across major cities including Tier II cities. While affordable housing had been a key theme during the H1FY1, real estate players have now shifted their focus to premium segment houses. Real estate prices are currently at their peak levels owing to a) rising levels of income and higher affordability, b) easy availability of finance, c) urbanization and evolution of nuclear family concept, d) soft interest rate regime and e) tax incentives under the Income Tax Act. While the demand for housing sector continues to remain strong, the shortage in the housing industry is pegged at 24.7mn units, depicting a huge demand-supply mismatch. Low Mortgage/GDP ratio Traditionally, people in India had resorted to buying property through their savings or borrowings from friends and relatives. Also, with lower real estate prices, average cost of property had remained low. Urbanization and emergences of nuclear family concepts in addition to easy availability of finance have resulted in emergence of mortgage business. Mortgage / GDP ratio in India, however, has remained low at 7%. This is relatively lower as compared to its Asian peers China (12%), Thailand (17%), Singapore (32%), and Hongkong (41%). Until FY22, HFCs (primarily HDFC and LICHF) had dominated the mortgage space with ~55% market share. Given the enormous growth potential, bank s entered this space in FY23, thereby capturing market share. Lower cost-of-funds, wide reach and healthy customer base provided banks an opportunity to increase their market share from 45% as at end FY2 to 71% as at end FY7. The soft interest regime during FY9 enabled HFCs to pass on the benefits of lower interest cost to its customers. Also, with teaser rate loan schemes announced by banks, HFCs, too introduced various competitive schemes. Mortgage / GDP ratio remains low at 7% Trend in market share in mortgage business HFC* Banks India China Thailand Malaysia Singapore Hongkong Germany 2 FY4 FY5 FY6 FY7 FY8 FY9 FY1 Source: HDFC, India Infoline Research Source: Companies, RBI, India Infoline Research * HFC includes only HDFC and LIC Housing Finance Company Report 8

9 HDFC Standard Life to launch its IPO by end FY12 Embedded value at Rs33.8bn as at end FY1, with individual NBAP margin at 25.8% HDFC SOTP valuation at Rs787, with core mortgage business valued at 3.5x FY12 PB HDFC SL valued at 18% NBAP margin and 12x multiple Value unlocking in subsidiary to drive valuations further, BUY HDFC has reportedly been planning an IPO for its life insurance business. While uncertainties over listing guidelines prevail, we believe that the process would complete by end-fy12. In recent past, HDFC SL disclosed its market consistent embedded value (MCEV) at Rs33.8bn for FY1 and also the individual NBAP margin at 25.8%. We value HDFC based on SOTP valuation and arrive at a target price of Rs787, implying an upside of 11.4% from current levels. The core mortgage book is valued at 3.5x FY12 book to arrive at target price of Rs487. Subsidiaries account for 38% of SOTP valuation a) HDFC-SL at 18% NBAP margin and 12x multiple to arrive at 64. b) 3% discount to market value of investment in HDFC Bank, Gruh Finance and unrealized gains to arrive at Rs195. c) General insurance, AMC and venture capital accounting for balance Rs41. The stock has underperformed its peers LICHF, Bankex Index and SBI ytd and currently trades at 4.6x 1-yr forward book. We expect valuations to re-rate significantly from current levels given a) immense potential in mortgage business, b) stable spreads, c) bestin-class returns ratio, d) minimal concerns on asset quality e) value unlocking in subsidiary and f) foray into educational loan space. HDFC currently trades above its 1-year average P/B (1-yr forward) 1-yr forward PB 8. (x) 1, (Rs) yr average forward PB at 3.4x x 5.8x 4.6x x 2.2x Apr-99 Jul-1 Oct-3 Dec-5 Apr-8 Jul-1 Apr-3 Jun-4 Aug-5 Oct-6 Dec-7 Feb-9 Apr-1 HDFC relative performance vs Sensex HDFC vs. peers (YTD price performance) (x) HDFC relative performance to Sensex Mar-6 Apr-7 May-8 Jun-9 Jul-1 Sensex Index HDFC SBIN Bankex Index PNB LICHF Source: Bloomberg, India Infoline Research Company Report 9

10 Financials Income statement Y/e 31 Mar (Rs m) FY9 FY1 FY11E FY12E Interest income 18,399 18, ,21 166,374 Interest expense (74,325) (7,631) (89,135) (111,355) Net interest income 34,74 38,11 45,67 55,19 Non-interest income 1,778 4,877 5,651 6,741 Total op income 35,852 42,978 5,718 61,759 Total op expenses (3,162) (3,238) (4,99) (5,94) Op profit (pre-prov) 32,69 39,74 46,619 56,665 Total provisions (5) (58) (812) (1,137) Profit before tax 32,19 39,16 45,87 55,529 Taxes (9,365) (1,895) (12,744) (15,449) Net profit 22,825 28,265 33,62 4,8 Balance sheet Y/e 31 Mar (Rs m) FY9 FY1 FY11E FY12E Total cash & equ. 57,867 77,249 75,71 56,321 Investments 14,687 17, , ,875 Advances 851, ,67 1,198,73 1,491,663 Total int-ear assets 1,14,535 1,164,193 1,398,4 1,674,859 Fixed assets 2,34 2,221 2,554 2,937 Total assets 1,16,569 1,166,414 1,4,558 1,677,796 Key ratios Y/e 31 Mar FY9 FY1 FY11E FY12E Profitability Ratios Net Interest Margin Interest spread Return on avg Asset Return on Avg Equity Non-Int Inc as % of Total Inc Net Profit growth (6.3) FDEPS Growth (6.4) Balance sheet ratios Loans / Total Assets Loans / Borrowings Loan growth Growth in Total Assets Per share ratios (Rs) EPS BVPS DPS Net worth 131, , , ,589 Secured loans 532, , , ,185 Unsecured loans 36,69 384, ,65 482,54 Total int-bear liabs 838, ,653 1,171,51 1,413,689 Non-int-bearing liabs 46,634 48,785 56,12 64,518 Total liabilities 131, , , ,589 Equity + Total liab 1,16,569 1,166,414 1,4,558 1,677,796 Credit quality ratios Gross NPLs as % of loans NPL coverage ratio Total prov. as % avg loan assets Net NPLs as % of net loans Capital adequacy ratio Total CAR Tier I capital ratio Company Report 1

11 Recommendation parameters for fundamental reports: Buy Absolute return of over +1% Market Performer Absolute return between -1% to +1% Sell Absolute return below -1% Published in 21. India Infoline Ltd 21 This report is for the personal information of the authorised recipient and is not for public distribution and should not be reproduced or redistributed without prior permission. The information provided in the document is from publicly available data and other sources, which we believe, are reliable. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from use of this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. The report also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. The recipients of this material should take their own professional advice before acting on this information. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. This report is from IIFL India Private Clients research and is for non-institutional clients. We maintain separate set up and strict Chinese walls between the IIFL Institutional research and IIFL India Private Clients research teams. Please note that the two teams may have different opinions and /or ratings on stocks and sectors. Both teams operate independently and their ratings may differ based on their independent research methodologies and multiple considerations like time horizon, client objectives and risk profiles, among others. IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai For Research related queries, write to: Amar Ambani, Head of Research at amar@indiainfoline.com or research@indiainfoline.com For Sales and Account related information, write to customer care: info@5pmail.com or call on