HDFCBSE SENSEX S&P CNX

18,793 5,717

Bloomberg HDFC IN

Equity Shares (m) 1,477.0

52-Week Range 794/601

1,6,12 Rel.Perf.(%) -4/0/6

M.Cap. (INR b) 1,108.5

M.Cap. (USD b) 20.7

* Price adj. for value of key ventures. BV is adj. by deducting invt in key ventures from NW; # Price adj. for value of key ventures. EPS

is adj. for dividend from key ventures

CMP: INR751 TP: INR812 Buy

23 October 2012

2QFY13 Results Update | Sector: Financials

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com) + 91 22 3982 5415

Umang Shah (Umang.Shah@MotilalOswal.com) + 91 22 3982 5521

Investors are advised to refer through disclosures made at the end of the Research Report.

1

HDFC reported 2QFY13 PAT at INR11.5b (in line with our estimate). Business growth remained healthy (loans and

AUM up ~22% YoY), and spreads and asset quality have remained stable QoQ. Key highlights:

HDFC's loans and AUMs grew ~22% YoY to INR1.5t and INR1.7t respectively. Individual loans (including sell-

downs) grew by 23% YoY, while corporate loans grew 19% YoY, 5% QoQ. Incrementally, 67% of AUM growth was

contributed by individual loans. AUM mix in terms of individual and corporate loans was stable at 67:33.

Net interest income (NII) growth of 11.5% YoY lagged AUM growth of 22% YoY despite stable spreads (2.27%).

While reported NIMs declined 10bp YoY, calculated NIMs have declined ~25bp YoY.

GNPAs on 90-day overdue basis declined to 0.77% from 0.79% in previous quarter. Within segments, %GNPAs

in individual segment stood at 0.65% and in the corporate segment stood at 0.89%.

Fee income declined to INR525m v/s INR789m in 2QFY12 and INR618m in 1QFY13. Profit on sale of investments

increased to INR941m v/s INR202m QoQ and INR869m YoY. Dividend income too remained high at INR1.95b

v/s INR1.6b in 1QFY13.

Other details: (1) During the quarter, HDFC routed interest on zero coupon NCDs through reserves to the tune

of INR1.2b v/s INR1.4b, (2) CAR stood at 16.7% with tier I ratio of 14.1%, and (3) The company utilized the

proceeds received from warrant conversion to redeem ZCDs to that extent.

Valuation and view: The stock trades at 4x FY14E Adj Price/ABV and Adj P/E of 14.3x. We believe valuations are

reasonable, considering HDFC's growth potential, sound business fundamentals, and substantially improved

subsidiaries' performance (life insurance business has turned profitable and unlikely to require further capital

infusion). We maintain Buy with an SOTP target price of INR812.

HDFC

23 October 2012 2

Quarterly performance v/s our estimates and reasons for deviation (INR m)

Y/E March 2QFY13E 2QFY13A v/s Exp Comments

Net Interest Income 14,663 13,859 -5 NII growth lagged AUM growth

YoY Change (%) 17.9 11.5

Profit on Sale of Investments 500 941 88

Other operating income 2,550 2,480 -3

Net Operating Income 17,713 17,281 -2 Lower NII compensated by higher trading gains

YoY Change (%) 20.2 17.3

Other Income 50 78 55

Total Income 17,763 17,358 -2

Operating Expenses 1,350 1,477 9 C/I ratio remained stable QoQ at ~8.5%

Pre Provisioning Profit 16,413 15,881 -3

YoY Change (%) 21.2 17.2

Provisions 424 400 -6 Asset quality remains stable

PBT 15,989 15,481 -3

YoY Change (%) 19.5 15.7

Provision for Tax 4,397 3,970 -10 Tax rate lower than expected

PAT 11,592 11,511 -1

YoY Change (%) 19.4 18.6

E: MOSL Estimates

Business growth remains healthy with loans and AUMs growing at~22% YoYHDFC's net loans during the quarter grew 22.2% YoY and 4.6% QoQ to INR1.55t. AUMs

too grew 22% YoY to INR1.71t. Individual loans (including sell-downs) grew 23.2% YoY

and 5.4% QoQ to INR1.15t. On the other hand, corporate loans too grew at a healthy

pace at 19.1% YoY and 5.4% QoQ to INR537.6b. Despite challenging environment,

sanctions grew 19% YoY and 24% QoQ to INR282b, while disbursements grew 22% YoY

and 62% QoQ to INR252b.

Asset quality remains impeccable%GNPAs on 90-day overdue basis declined to 0.77% from 0.79% QoQ. Within segments,

%GNPAs in the individual segment stood at 0.65% and in the corporate segment stood

at 0.89%. Provisioning expenses for the quarter remained stable at QoQ INR400m,

though higher than INR170m in 2QFY12. Outstanding provisions at the end of 2QFY13

including standard asset provisions on the balance sheet stood at INR17.5b (113bp of

outstanding loans).

Other details In 2QFY13, HDFC routed interest on zero coupon NCDs through reserves to the

tune of INR1.2b v/s INR1.4b in 1QFY13. At the end of the quarter, outstanding

ZCD's stood at INR53b as HDFC utilized proceeds from conversion of warrants to

redeem such bonds. As a result, the borrowings through bonds were replaced by

borrowings.

CAR stood at 16.7% with tier I ratio of 14.1%.

HDFC

23 October 2012 3

HDFC: Trend in earnings (INR m)

2QFY13 2QFY12 YoY Gr% 1QFY13 QoQ Gr% 1HFY13 1HFY12 YoY Gr%

Interest Income 49,273 39,340 25 46,924 5 96,197 75,438 28

Interest Expense 35,414 26,905 32 33,882 5 69,296 52,054 33

Net Interest Income 13,859 12,435 11 13,042 6 26,901 23,384 15

Fees 525 789 -33 618 -15 1,143 1,363 -16

NII Including fees 14,385 13,224 9 13,659 5 28,044 24,746 13

Dividend 1,945 629 209 1,596 22 3,541 1,951 81

Net Operating Income 16,329 13,854 18 15,255 7 31,585 26,697 18

Other Income 88 64 37 83 5 171 124 38

Net Income 16,417 13,917 18 15,339 7 31,756 26,822 18

Operating Expenses 1,477 1,239 19 1,342 10 2,819 2,371 19

Provisions 400 170 135 400 0 800 350 129

PBT ex capital gains 14,540 12,508 16 13,597 7 28,137 24,101 17

Capital Gains 941 869 8 202 365 1,144 1,031 11

Reported PBT 15,481 13,377 16 13,799 12 29,280 25,132 17

PAT 11,511 9,707 19 10,019 15 21,530 18,152 19

Source: Company, MOSL

Valuation and view Business growth will be driven by continued momentum in individual home loan

segment and traction in housing demand in tier II / tier III cities. We model in loan

CAGR of ~20% during FY12/14E.

Despite steep increase in rates, HDFC has been able to maintain its spreads through

its active asset-liability management. HDFC is now replacing its high cost bank

borrowings through relatively low cost bonds and debentures, which should help

contain its cost of funds going forward and maintain spreads.

We expect HDFC to report an EPS of INR32 in FY13 and INR38 in FY14. Core return

ratios are likely to remain strong. Adjusted book value (ABV, adjusted for

investments in subsidiaries) would be INR106/share in FY13 and INR125/share in

FY14. We are not deducting the last equity investment into HDFC Bank (INR40b)

from net worth, as it is funded by non-convertible debentures (NCDs) till FY12

and FY13 ABV accounts for conversion of warrants and last investment in HDFC

Bank. Key investments, viz, HDFC Bank, HDFC Life, HDFC AMC, General Insurance,

etc are valued at INR249/share (post holdco discount of 20%) on FY14 basis.

The stock trades at Adj P/BV of 4x FY14E (price adjusted for value of key ventures

and book value adjusted for investment in those ventures) and Adj P/E of 14.3x

FY14E. We believe these valuations are reasonable, considering HDFC's growth

potential, sound business fundamentals, and substantially improved subsidiaries'

performance (life insurance business has turned profitable. We maintain Buy with

an SOTP target price of INR812.

HDFC

23 October 2012 4

We maintain our estimates for FY13/14E (INR b)

Old Estimates Revised Estimates Change (%)

FY13 FY14 FY13 FY14 FY13 FY14

NII 63.9 77.2 62.4 75.8 -2.2 -1.8

Other Income 11.3 12.9 12.0 13.5 6.1 4.4

Total Income 75.1 90.2 74.4 89.3 -1.0 -0.9

Operating Expenses 5.5 6.6 6.0 7.2 9.2 8.0

Operating Profits 69.6 83.5 68.4 82.1 -1.8 -1.7

Provisions 2.0 2.2 1.7 2.1 -11.5 -3.3

PBT 67.7 81.3 66.7 80.0 -1.5 -1.6

Tax 18.4 22.2 17.7 21.8 -4.2 -1.6

PAT 49.2 59.2 49.0 58.2 -0.5 -1.6

NIMs 3.6 3.7 3.6 3.7

RoA (%) 2.9 2.9 2.9 2.9

Core RoE (%) 29.4 30.9 29.2 30.4

Source: MOSL

HDFC

23 October 2012 5

Quaterly trends

Disbursements (INR b) up 22% YoY

… so did the AUMs (up 22% YoY)

Borrowing mix (%)

Proportion of bank term loans declined QoQ, as HDFC is

replacing bank term loans with bond, debentures and

deposits

Sanctions (INR b) up 19% YoY

Despite challenges, sanctions growth remains healthy

Individual loans (incl. sell downs) grew 23% YoY, while

corporate loans grew by 19% YoY

AUM mix (%)

Proportion of AUM mix remained largely stable

Loans grew by healthy 22% YoY…

Disbursement growth remained healthy both on a YoY as

well as on a QoQ basis

Over last 12 months, HDFC sold loans worth INR56.3b and

on a cumulative basis the loans sold stood at INR157b

HDFC

23 October 2012 6

Quaterly trends

NII including fees up 19% YoY (%)

Fee income growth remained muted at 8% YoY and 3% QoQ

GNPA on 90 days overdue basis (%)

Fee income declined 33% YoY and 15% QoQ affecting the

overall NII (incl. fee income) growth

Fee income remained subdued due to waiver of pre-

payment penalty

Asset quality continues to remain healthy

NII grew 19% YoY (%)

NII growth at 11% YoY lagged AUM growth despite stable

spreads

Spreads remained stable QoQ at 2.27%

Dividend and trading gain as a % to Op. Income increases

Spreads stable QoQ (%)

Higher trading gains and dividend income resulted led to

increase into its share on operating income

HDFC

23 October 2012 7

Quarterly Snapshot

FY12 FY13 Variation (%) Cumulative Numbers

1Q 2Q 3Q 4Q 1Q 2Q QoQ YoY 1HFY12 1HFY13 YoY Gr (%)

Profit and Loss (INR m)

Net Interest Income 10,948 12,435 12,364 17,434 13,042 13,859 6 11 23,384 26,901 15

Other Operating Income 2,072 2,299 2,186 2,024 2,426 3,421 41 49 4,371 5,847 34

Miscellanous Income 47 52 52 63 74 78 5 49 99 151 53

Net Income 13,067 14,786 14,601 19,520 15,541 17,358 12 17 27,853 32,899 18

Operating Expenses 1,132 1,239 1,119 1,030 1,342 1,477 10 19 2,371 2,819 19

Employee 528 526 508 497 609 621 2 18 1,053 1,230 17

Others 604 713 611 533 733 856 17 20 1,317 1,589 21

Operating Profit 11,935 13,547 13,483 18,491 14,199 15,881 12 17 25,482 30,080 18

Provisions 180 170 200 250 400 400 0 135 350 800 129

PBT 11,755 13,377 13,283 18,241 13,799 15,481 12 16 25,132 29,280 17

Taxes 3,310 3,670 3,470 4,980 3,780 3,970 5 8 6,980 7,750 11

PAT 8,445 9,707 9,813 13,261 10,019 11,511 15 19 18,152 21,530 19

Asset Quality (%)

GNPA (90dpd) 0.8 0.8 0.8 0.7 0.8 0.8

GNPA (180dpd) 0.6 0.5 0.5 0.4 0.5 0.0

Ratios (%)

Cost to Income 8.7 8.4 7.7 5.3 8.6 8.5 8.5 8.6

Provision to operating profit 1.5 1.3 1.5 1.4 2.8 2.5 1.4 2.7

Tax Rate 28.2 27.4 26.1 27.3 27.4 25.6 27.8 26.5

CAR 13.8 13.8 13.9 14.6 14.6 16.7 210 290

Tier I 12.2 11.7 11.9 11.7 11.8 14.1 230 240

Spreads (Cum.) 2.3 2.3 2.3 2.3 2.3 2.3 0 -2

Other Operating Inc. 2,072 2,299 2,186 2,024 2,426 3,421 41 49 4,371 5,847 34

Profit on sale of Invest 163 869 880 791 202 941 365 8 1,031 1,144 11

Fees and other charges 573 789 721 600 618 525 -15 -33 1,363 1,143 -16

Dividend Income 1,322 629 530 615 1,596 1,945 22 209 1,951 3,541 81

Balance Sheet (INR b)

Networth 181 187 195 190 205 244 19 31

Borrowings 1,235 1,251 1,271 1,391 1,438 1,478 3 18

Total liabilities 1,416 1,438 1,466 1,581 1,643 1,722 5 20

Net Loans 1,242 1,270 1,322 1,409 1,483 1,551 5 22

Investments 173 150 134 122 152 150 -1 0

Total Assets 1,416 1,438 1,466 1,581 1,643 1,722 5 20

Business (INR b)

Sanctions 195 237 199 270 228 282 24 19 433 510 18

Disbursements 130 208 161 212 156 253 62 22 338 409 21

AUM 1,360 1,402 1,457 1,554 1,621 1,709 5 22

AUM Mix (%)

Individual Home loans 66 67 67 66 67 67

Corporate Bodies loans 34 33 33 34 33 33

AUM Mix (%)

On books 91 91 91 91 91 91

Off books 9 9 9 9 9 9

Borrowing Mix (%)

Term Loans 34 26 20 29 26 13

Bonds, Deb, etc 42 49 53 45 46 54

Deposits 25 25 27 26 28 33

For %age change QoQ and YoY is bp Source: Company, MOSL

HDFC

23 October 2012 8

EPS: MOSL forecast v/s consensus (INR)

MOSL Consensus Variation

Forecast Forecast (%)

FY13 32.0 31.8 0.7

FY14 38.0 37.8 0.7

Shareholding pattern (%)

Sep-12 Jun-12 Sep-11

Promoter 0.0 0.0 0.0

Domestic Inst 13.9 15.1 14.1

Foreign 73.0 71.3 73.4

Others 13.1 13.6 12.6

1-year Sensex rebased

HDFC

23 October 2012 9

Financials and Valuation

HDFC

23 October 2012 10

Financials and Valuation

HDFC

23 October 2012 11

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