Analyst Corner: Retain ‘add’ on HDFC with revised FV of Rs 2,240

Business trends improving, moratorium book to be monitored. Strong liability-side re-pricing and improvement in business momentum during September were key positives in HDFC’s 2Q performance. Collection efficiency in September was strong (96% in individual business) and on expected lines although the performance of its moratorium book was a tad weak and may need to be monitored over the next few months. Overall business outlook remains positive with improvement in real estate sales and NIM support. Retain ADD with FV of Rs 2,240 (up from Rs 2,075).

HDFC reported 11% yoy disbursements growth in September followed by 35% yoy growth (22% adjusting for festive seasonality) in October 2020, significantly improving from previous months; the company had reported 5% yoy decline for 2QFY20. Sharp increase in real estate sales (which likely reflects pent-up sales, price cuts, lower interest rates, lower registration charges,etc.) coupled with low home loan rates offered by HDFC (~7% for new loans) has supported business; while it still remains unclear if real estate sales will remain strong, we continue to build in moderate growth in the near term. HDFC has seen massive tailwinds from the funding side. While fall in interest rates is not fully passed on to existing borrowers (the company recently cut rates by 40 bps for existing borrowers), lockdown-related challenges reduced balance transfer applications.

We expect NIM compression in 2HFY21 even as funding-side tailwinds continue. Among positive topline momentum, HDFC’s collections were a tad below expectations. The overall collection efficiency in the individual business was 96.3% in September 2020; 99.5% in case of customers who had not opted for moratorium. Thus, collections in the individual moratorium book will be low at about 81%; this compares to the non-prime vehicle finance NBFCs (that have reported ~85-90% collections). However, HDFC’s moratorium book is much smaller (17% in last quarter) as compared to 75-90% for NBFCs.