After meeting Q2 expectations, HDFC's growth outlook appears healthy

Analysts positive on stock, expect it to trade in the Rs 2,750-Rs 3,000 range

Strong growth in individual mortgages and disbursements drove HDFC’s July-September quarter (Q2) results, which were in line with market expectations. There was some pressure on NIM (net interest margin) due to a lag in the transmission of rates. Asset quality improved slightly, and there’s optimism that NIM shall be better and asset quality will continue to improve in Q3.
 

The mortgage major reported PAT of Rs 4,450 crore, which was up 18 per cent year-on-year (YoY) and 21 per cent quarter-on-quarter (QoQ). The effective tax rate dropped due to higher dividend income. 
 

The pre-provision operating profit (PPOP) of Rs 5,890 crore was up 15.5 per cent YoY and 15 per cent QoQ. There was a small improvement in interest yield of about 10 basis points YoY but NIM dropped by around 20 basis points YoY due to a transmission lag between the higher cost of borrowings and lending.  
 

Individual disbursements were Rs 43,000 crore, up 2 per cent sequentially and 13 per cent YoY. Disbursements in the individual segment grew 36 per cent YoY to Rs 44,000 crore. AUM were at Rs 6.9 trillion, up 15 per cent YoY and 3.3 per cent QoQ despite shrinking corporate loan book. Asset quality continued to improve with GS3 (gross stage 3) at 1.9 per cent (down 21 basis points) and GS2 at 3.9 per cent (down 41 basis points). The restructured book was held at 0.8 per cent, down 7 basis points. 

 

The NIM was 2.59 per cent for the second consecutive quarter (entire H1FY23), down 13 basis points YoY. The yield in the non-individual book remains under pressure as the quality of the book improves and developers seek better rates. The rate transmission in retail home loans is swifter since retail loans by banks are linked to external benchmarks; this provides room for HFCs (housing finance companies) to raise lending rates. 
 

Going forward, NIM should recover as lending rates will be hiked to adjust for the higher cost of borrowing. The repricing period for new individual loan disbursements has also been reduced to 1 month, from 3 months. Individual loans comprise 81 per cent of AUM. The management claims it has a strong pipeline in construction finance (CF) and LRD (lease rental discounting), and expects growth in the non-Individual segment to accelerate.  
 

While most analysts are positive on the stock, the valuation will naturally be affected by the swap ratio with HDFC Bank, and that in turn, will be affected by the valuation of the bank. HDFC has received approval for the merger from the RBI and the CCI, and the NCLT has passed an order of amalgamation, with shareholders meeting for November 25, 2022. Of the loan book, Rs 1.2 trillion qualifies for the priority sector lending of the bank. Except for acquisition funding and corporate loans against securities, all other wholesale loans qualify for the bank's loan book.
 

The stock market response to the results was neutral. Analysts have a valuation in the range of Rs 2,750 -Rs 3,000, which indicates an upside from the current levels of Rs 2,487.