HDFC continued to experience consistent growth in FY08. Net profit surged 55% in FY08, while asset size increased 29%.
In a period of slowdown, essentially in FY08, the company maintained its growth rate by substituting corporate loans with individual loans.
In Q408, spreads increased by 14 bps to 2.32%. The net interest margin (based on quarterly averages) went up 29 bps y-o-y to 1.26%. Going forward, high margins coupled with the growth in advances will help in sustaining the growth momentum.
HDFC has consistently reduced its NPLs by adhering to sound risk-management policies such as adopting a low loan-to-value ratio and lending primarily to end-users of the property. At the end of FY08, gross NPLs (3 months) fell 8 bps y-o-y to 0.84% and the credit cost fell 8 bps to 0.84%.
Our target price of Rs3,050 for FY09E for HDFC is based on the sum-of-the-parts valuation methodology. We have arrived at a target P/B multiple of 4.01x for the standalone business by using the two-stage Gordon growth model (assuming a sustainable RoE of 21%). Thus, the standalone mortgage business is valued at Rs2,086.
The stake in HDFC Bank has been valued at Rs468 on the basis of our target price of Rs1,639 for the same. HDFC Standard Life has been valued at a target NBAP (new business achieved profit) multiple of 18x. This values HDFC’s stake in the insurance business at Rs334. The AMC has been valued at 8% of its AUM, which gives a valuation of Rs. 161.