Religare Capital is bullish on Housing Development Finance Corporation (HDFC) and has recommended buy rating on the stock with a target of Rs 1075 in its July 21, 2014 research report.
Robust retail growth; spreads stable QoQ: Advances growth of 14.9% YoY was primarily driven by the retail segment (+17% YoY; 17% YoY after adding back sold loans), even as growth in the corporate book remained subdued at 10.5% YoY. The overall loan book (adj. for the sell-down) grew 15% YoY. Spreads remained stable QoQ at 2.29% in Q1FY15 led by a 4bps improvement in corporate spreads and a largely stable retail print at 1.96% (down 1bps QoQ). Management expects loan growth of ~ 16-17% for FY15 as there are signs of revival in non-retail growth.
Asset quality firm; other income driven by dividend : GNPL in the individual segment increased marginally by 2bps QoQ to 0.55%, whereas that in the corporate segment was stable at 1.01%. Overall GNPL was largely stable at 0.7% (up 1bps QoQ). Outstanding provisions stood at Rs 19.3bn, of which Rs 4.7bn were NPL provisions. Growth in other income was robust at 38% YoY (5% QoQ), largely driven by higher dividends including Rs 300mn by Gruh Finance. As per management pick up in fee income was aided by some buoyancy in growth in non-retail book.
Maintain BUY on high earnings visibility: We expect HDFC to report strong earnings CAGR of ~16.5% over FY14-FY16. The stock is trading at 14.4x FY15E EPS and 3.7x FY15E BV (after adjusting for subsidiaries). Valuations are reasonable given the strong earnings visibility and high core ROE of ~27%.
"HDFC posted marginally better PAT than expected at Rs 13.5bn in Q1FY15, marked by higher NII and better other income, partly offset by Rs 744mn of deferred tax liability. Advances grew 14.9% YoY driven by retail loans (+17% YoY). Interest spreads remained stable QoQ at 2.29%. Asset quality in the corporate segment was steady at 1.01%, while GNPL in the retail segment increased 2bps QoQ to 0.55%. Valuations at 14.4x EPS/3.7x BV on FY15E (adj. for subsidiary valuation) are reasonable given strong earnings growth and high core ROE of ~27%. Maintain BUY with a target price of Rs 1,075," says Religare Capital research report.
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