HDFC has a time-tested business model and has successfully sailed through challenging environments.
Historically, HDFC has been able to maintain a loan book growth of over 25%. Its loan book has witnessed a CAGR 26% over FY03-09. During FY09 its loan book grew by 17% to Rs851.95 billion.
The loan book is likely to witness relative moderation, however the improving macroeconomic scenario coupled with residential project developers thrust on affordable housing are expected to help accelerate the demand towards Q2FY10.
During Q1FY10 HDFC reported a healthy growth of 21% in its disbursements and a 23% growth in sanctions. The overall loan growth stood at 13% to Rs870 billion.
For FY10 we expect a 20-22% growth in loan disbursement and a 22% growth in the mortgage loans to Rs1,039 billion.
In the light of improve business outlook and better liquidity conditions; we have marginally tweaked our earnings estimates.
We continue to maintain our estimates for HDFC with NII Rs38.8 billion (14% y-o-y) and net profit of Rs26.8 billion (20% y-o-y) which translates into an EPS of Rs94.
Preeminent return ratios have fetched HDFC premium valuations, lower earnings growth and absence of treasury profits impacted its return ratios. We expect RoE to improve to 19.3% in FY10. However, we believe that treasury profits will improve as the capital market gains momentum.
We continue to maintain our positive outlook for HDFC in the light on improved macroeconomic scenario. However we will revisit our estimated post Q1FY10 results.
Valuations are based on sum-of-the-part methodology; we have valued the core business (mortgage finance) at Rs1,550 which is P/ABVx of 3.1x its FY10E adjusted book value of Rs.493.
HDFC’s subsidiaries and associates are valued at Rs947. Based on our workings, HDFC’s sum-of-the-parts (SoTP) price target stood at Rs2,497.
Given the limited upside from our price target, we retain our ACCUMULATE recommendation for the stock with a price target of Rs2,495.
At the current price, the stock trades at P/Ex of 26.5x, P/ABVx of 5x of its FY10 earnings estimates.