HDFC rating: Buy — Excess buffers to back earnings traction

HDFC has strengthened its balance sheet further with recent capital raise (shoring up tier-1 to 19.5%) over and above provisioning buffer of 2.64% of AUM and excess liquidity (at >5% of balance sheet). While movement from Morat 1.0 to Morat 2.0 has not been overwhelming (higher print at 16.6% for retail and 39% for non-retail) due to request-based disclosure approach (not collection efficiency), flow into restructuring will still be restricted. Similar to actions in Q4FY20, HDFC might proactively prefer recognising non-Covid stress upfront (rather than restructuring).

Disbursement trends m-o-m (>80% in July) suggest normalisation in a couple of months and start of growth phase post Q3FY21. Factoring in the recent capital raise, we revise our EPS and BV upwards by 10%/1% and 12.7%/13.4%, respectively, for FY21e/FY22e. We maintain our stance of excess buffers (credit cost, liquidity, capital) and superior profile to support earnings traction and help consolidate HDFC’s positioning amidst adversity. Maintain Buy with a revised SoTP-based target price of Rs 2,423 (earlier: Rs 2,345).

Dissecting moratorium across sub-segments: The movement from Morat 1.0 (27% of overall AUM) to Morat 2.0 (22.4% as of July) has not been overwhelming. Moratorium within individual loans was down to 16.6% from 22.6%. Of the non-retail portfolio constituting 26% of AUM, 39% is under moratorium. Within non-retail sub-segments, almost 70% of developer loans, ~20% of corporate loans and 15% of LRD was under moratorium. As the company is disclosing proportion of moratorium requests, we are not expecting any significant change in trend from July (disclosed numbers) to August.

How much of moratorium can flow into restructuring: Based on customer feedback, of the retail moratorium customers, <15% have faced job losses or business closures. In non-retail, >70% have made part/full payment of interest during moratorium. Key monitorable would be the balance 30% (10% of non-retail representing 2.8% of AUM) who have not made any payment at all. Even in the worst case, assuming 15% of retail moratorium and 40% of non-retail moratorium customers seek restructuring, the restructured pool would translate to ~6.5% of AUM, calling for an additional 65bps of provisioning.

Adequate provisioning buffer to cushion earnings volatility: HDFC has been utilising 30% of any windfall gains in building a contingency buffer. Thereby, it now has Rs 122 bn of provisioning reserves and >50% of it is towards the unrecognised stress pool. With this buffer, incremental provisioning requirement will be capped at 1.2%/0.8% over FY21e/FY22e.

Disbursements normalising to a large extent: There has been consistent m-o-m improvement in retail disbursements (June run-rate at 68% of last year, July at 81%). The company should report y-o-y growth post Q3FY21. In the interim, for a quarter or so, traction gained m-o-m will be offset by improved repayment run-rate post Morat 2.0. We are building in loan growth of 9% by FY21-end and 14% for FY22.

Factoring in capital raise into estimates: HDFC has recently raised Rs140 bn via QIP through a combination of equity shares + NCD/warrants structure issuing 56.8mn shares at Rs 1,760/sh and 17mn warrants (convertible into equity in three years at Rs 2,175). This has shored up its tier-1 capital by >320bps to 19.5%. Factoring this in, we revise our EPS upwards by 10%/1% for FY21e/FY22e.