Buy HDFC; target of Rs 2225: Motilal Oswal

Motilal Oswal’s research report on HDFC

HDFC Ltd. (HDFC) reported a 22% beat on PAT, helped by a lower tax rate (20% v/s estimate of 30%). Core PBT (up 11% YoY) was in line with estimate. The company made one-off provisions of INR800m, in line with its policy of 30% of one-off gains, to strengthen the balance sheet. The quarter was also marked by healthy AUM growth (+18% YoY/+4%QoQ), sequentially stable cost of funds (calculated) despite rising bond yields, and stable asset quality. Loan growth in the retail segment remained steady (+5% QoQ, +18% YoY), while that in the corporate segment (+2% QoQ, +17% YoY) was marginally lower than the trend in the past few quarters. Overall, the share of retail home loans was up 50bp QoQ at 72.9%. HDFCB has not bought back loans over the last two quarters, leading to a rise in the share of on-book AUM to 90% v/s 88% a year ago. Asset quality was steady, with the GNPL ratio in retail and corporate lending largely unchanged sequentially at 1.11% and 2.18%, respectively. Reported spreads were steady at 2.29% for 4QFY18 and also for full-year FY18. However, gross fee income declined 11% YoY to INR2.4b. C/I ratio (excl. one-off gains) was up 50bp YoY to 6.3%. Capital raise of ~INR130b happened toward the end of quarter, and thus, there was not much benefit on NII during the quarter.


HDFCs retail loan growth is impressive, despite intense competition and a high base. Over the past four quarters, corporate loan growth has also picked up smartly. Also, with access to multiple sources of borrowings, we believe HDFC will be able to manage spreads well in this environment of rising GSec yields. We build in recent capital raise of ~INR130b in our estimates (of which we expect it to invest INR85b in HDFCB). We largely maintain our estimates. Buy with an SOTP-based TP (FY20) of INR2,225.

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