HDFC’s Q1’10 net profit declined 23% q-o-q to Rs. 5.6 billion driven by a sharp fall in the net interest income (NII) and in the fee and charges.
While the growth in its loan-book and in other operating income was satisfactory, the contraction in spreads resulting in the decline of NII is a cause for concern.
Although we have reduced the estimates for average spreads in the near term, we have increased those for loan-book expansion, which bolsters our fair-value estimate to Rs2,501.
Presently the stock trades at a P/B multiple of ~4.7x, which we believe is fairly high given the uncertainty regarding its Insurance businesses.
Current prices, in our view, do not merit position building, and therefore, we maintain our HOLD rating.
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