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HDFC + LIC Housing Finance Steal the Show

July 16, 2010

HDFC Robust growth of 62% in new residential loans led to a 17% loan book growth after sell-down of some part of the loan book. While new developer loans data were unavailable, we believe overall disbursements (new loans) grew 25-30% in 1QFY11. Home loan spreads, too, grew from last year to 2.34%. Fees and capital gains are typically lumpy and hence acted as a drag on top-line growth, even though operating profits grew 24% and earnings 23%. If fee and capital gains growth had remained flat yr/yr, earnings growth could have been as high as 35%, beating the Street by 9ppts.

Retail business was stronger with a disbursement growth of 62% yoy, aided by a buoyant environment and favorable base. We believe that strong traction in mortgages will continue to drive HDFC’s earnings in the medium term.

HDFC booked dividend income of INR 1.2 bn, including dividend of INR 980 mn from HDFC Bank (pertaining to its direct holding). Dividend on indirect holding through HDFC Investments will accrue in Q2FY11. Fee income at INR 234 mn was lower than expectations as it waived charges on non-individual loans. Profit on sale of investments in IL&FS will be booked once it receives FIPB approval

HDFC EPS Estimates for FY 11 and FY 12:
Kotak SOTP Valuation for HDFC is Rs 3,500 with EPS estimates of 120 and 143
HSBC – 119 and 143 with target of 3010
Edelweiss – 118 and 141
Goldman Sachs – 112 and 138 with target of 3000
UBS – 114 and 130
Morgan Stanley – 114 and 136 with target of 3465
JP Morgan – 120 and 147 with target of 3000

LIC Housing Finance:
LIC Housing Finance (LICHF) reported net profit of Rs2.12 bn in Q1FY11, reflecting 71% yoy growth. NII was up 69% yoy (on a lower base), buoyed by 60bp yoy expansion in NIMs from low level of 2.45%. Disbursement growth continued to be strong at 39.6% yoy in Q1, with individual disbursements up 32% yoy.

Key concern remains that LICHF, like other wholesale borrowers, could see pressure on spreads as (1) incremental cost of funds rise (up 42bp qoq to 7.45% in Q1FY11) with liquidity tightening, and (2) there is limited rise in lending rates as the company maintains competitive rates (incremental yields down 52bp qoq to 9.63%) for above-industry growth rates.

LIC Housing Finance FY 11 and FY12 EPS Estimates
Edelweiss – 90 and 111
BOFA Merrill – 92 and 95 with target of 820
Goldman Sachs – 90 and 99 with target of 920
KOtak – 78 and 95 with target of 925

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