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HDFC – Consistent Wealth Creator

January 17, 2011

HDFC reported F3Q11 PAT of Rs 8.9 bn (+33% YoY / +10% QoQ) This was higher than estimate of Rs. 8.2 bn though it included capital gains (pre-tax) of Rs 1.67 bn [Sale of IL&FS Investment]. Headline loan growth accelerated to 20.6% YoY from 18.7% in the previous quarter and adjusted loan growth (i.e. including sell-downs) picked up to 27% from 24%.

Housing Loan Growth – is picking up for HDFC Ltd after being subdued for most part of last year. Balance sheet loan growth has picked up from 9% YoY in 3Q FY10 to21% in 3Q FY11. Disbursement growth for the quarter was at 21% YoY lower than the 25%+ levels seen in previous quarters, probably due to lower disbursement on the developer portfolio. Individual loan sanctions and disbursements for 9M have grown at a very healthy pace of 39% YoY and 38% YoY, respectively.

HDFC indicated that they have met the additional provisioning requirement for teaser rate loans/nonindividual loans by transferring Rs. 2.7 bn from existing excess reserves (i.e. no impact on P&L).

HDFC continues to improve on cost to income (9.4% adjusted for oneoff treasury gains). Asset quality remains robust with Gross NPAs
improving further to 0.85% and down 9bps y/y.

Clearly from a long-term perspective we believe HDFC Ltd is on track to show an improving trajectory of growth and profitability metrics. We would recommend investors to hold onto the stock and BUY at levels of Rs 630 for target price of Rs 775 based on the Sum of the Parts Valuation as company has significant investments in HDFC Banking & Insurance which are rock solid performers.

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