4QFY2013 Result Update | HFC

May 9, 2013

HDFC
Performance Highlights

Particulars (` cr) NII Pre-prov. profit PAT

Source: Company, Angel Research

NEUTRAL
CMP Target Price
% chg (qoq) 28.7 34.0 36.4 4QFY12 1681 1849 1326 % chg (yoy) 13.0 14.9 17.3

`880 HFC 134,961 1.0 900/611 133,698 2 20,076 6,098 HDFC.BO HDFC@IN

4QFY13 1,899 2,125 1,555

3QFY13 1,476 1,585 1,140

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

HDFC reported standalone earnings growth of 17.3% yoy for 4QFY2013. Healthy loan book growth of around 21% yoy and stability witnessed on the spreads as well as on the asset quality front, were the key highlights from the results. Loan book growth remains healthy: During 4QFY2013, HDFCs loan book grew by a healthy 20.8% yoy, with loans to the individual segment growing by 25.4% yoy. HDFC has been incrementally growing its individual loan book, much faster than its corporate loan book over the last one year. Including loan sold, individual loans contributed around 81% of total incremental loan book during FY2013. The spreads stood largely stable at 2.30% for FY2013 compared to 2.27% for FY2012, while the reported net interest margin grew sequentially by 11bp yoy to 4.2% during the year. Asset quality continues to remain strong for the company, as its gross NPA ratio came in at 0.7%, improving from 0.75% reported in 3QFY2013 and 0.77% in 2QFY2013. The company continues to maintain a 100% PCR. For 4QFY2013, profits on sale of investments grew strongly by 32.7% yoy at `105cr. Other income was higher by 83.6% yoy at `12cr. Going ahead, NIMs are likely to face modest pressure; on back of higher incremental lending to individuals (individual loans have lower spread compared to non-individual loans). However, with loan book growing at above industry CAGR of 20.0% over FY2013-15E, we expect the company to sustain healthy NII CAGR of 18.6% over the same period. Outlook and valuation: At the current market price, HDFCs core business (after adjusting `271/share towards the value of its subsidiaries) is trading at 4.1x FY2015E ABV. We expect HDFC to post a healthy PAT CAGR of 17.9% over FY201315E. However, considering that the stock is currently trading at 4.1x FY2015E ABV and at around 59% premium to the Sensex in P/E terms (compared to an average of 39.4% since FY2006). We consider the stock to be fairly valued and hence, recommend a Neutral rating on the stock. Key financials (standalone)
Y/E March (` cr) NII % chg Net profit % chg NIM (%) EPS (`) P/E (x) P/ABV (x) RoA (%) RoE (%)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 13.8 73.3 12.9

Abs. (%) Sensex HDFC

3m 3.0 8.0

1yr 22.3 34.0

3yr 15.8 56.2

Vaibhav Agrawal
022 3935 7800 Ext: 6808 vaibhav.agrawal@angelbroking.com

FY2012 4,998 17.7 4,123 16.6 3.6 27.9 31.5 6.8 2.7 22.7

FY2013 5,927 18.6 4,848 17.6 3.6 31.4 28.1 5.4 2.7 22.0

FY2014E 7,072 19.3 5,716 17.9 3.6 37.0 23.8 4.9 2.6 21.7

FY2015E 8,472 19.8 6,747 18.0 3.6 43.6 20.2 4.4 2.6 22.9

Sourabh Taparia
022 3935 7800 Ext: 6872 sourabh.taparia@angelbroking.com Akshay Narang 022 3935 7800 Ext: 6829 akshay.narang@angelbroking.com Harshal Patkar 022 3935 7800 Ext: 6847 harshal.patkar@angelbroking.com

Please refer to important disclosures at the end of this report

HDFC | 4QFY2013 Result Update

Exhibit 1: Quarterly performance (standalone)

Particulars (` cr) Income from operations Interest expensed NII Non-interest income Operating income Operating expenses Pre-prov. profit Provisions & cont. PBT Prov. for taxes PAT EPS (`) Cost-to-income ratio (%) Effective tax rate (%)
Source: Company, Angel Research

4QFY13 5,561 3,440 2,121 117 2,238 113 2,125 25 2,100 545 1,555 10.2 5.1 25.9

3QFY13 5,146 3,521 1,624 105 1,729 144 1,585 40 1,545 405 1,140 7.4 8.3 26.2

% chg (qoq) 8.1 (2.3) 30.6 11.3 29.4 (21.3) 34.0 (37.5) 35.9 34.4 36.4 37.0

4QFY12 4,806 2,939 1,867 85 1,952 103 1,849 25 1,824 498 1,326 9.0 5.3 27.3

% chg (yoy) 15.7 17.0 13.6 36.4 14.6 9.9 14.9 15.1 9.3 17.3 12.9

FY2013 20,797 13,891 6,906 351 7,257 539 6,718 145 6,573 1,725 4,848 31.5 7.4 26.2

FY2012 17,063 11,157 5,906 292 6,198 452 5,746 80 5,666 1,543 4,123 28.0 7.3 27.2

% chg 21.9 24.5 16.9 20.3 17.1 19.3 16.9 81.3 16.0 11.8 17.6 12.5

Exhibit 2: 4QFY2013 Actual vs Angel estimates

Particulars (` cr) Net interest income Non-interest income Operating income Operating expenses Pre-prov. profit Provisions & cont. PBT Prov. for taxes PAT
Source: Company, Angel Research

Actual 2,121 117 2,238 113 2,125 25 2,100 545 1,555

Estimates 2,265 105 2,369 126 2,244 49 2,195 646 1,549

% chg (6.3) 11.3 (5.5) (9.9) (5.3) (48.9) (4.3) (15.7) 0.4

May 9, 2013

HDFC | 4QFY2013 Result Update

Loan growth healthy; outlook remains strong

For 4QFY2013, HDFCs loan book grew by a healthy 20.8% yoy, with loans to the individual segment growing by 31.0% yoy (after adding back sold loans) and 25.4% (excluding sold back). HDFC has been incrementally growing its individual loan book much faster than its corporate loan book over the last one year. Including loan sold, individual loans contributed around 81% of total incremental loan book during FY2013. Individual loans now constitute 68% of the total loan book. We have factored in a loan book CAGR of 20% over FY2013-15E.

Exhibit 3: Loan book growth healthy at 20.8% yoy

Advances (`cr) 170,000 150,000 130,000 110,000 20.2 19.4 22.2 Growth (yoy, %) 21.7 20.8 24.0 22.0 20.0 18.0

Exhibit 4: Individual loan growth higher at 25.4% yoy

Ind. loans as % to Total Ind. Loan growth (%) -RHS Non Ind. loans as % to Total Non Ind. loan growth (%) -RHS
30.0 25.0

120.0 100.0

36.2

80.0 60.0

36.8

35.7

35.6

34.5

34.6

20.0 15.0

140,422

148,262

154,635

160,941

64.4

63.8

70,000 50,000

14.0 12.0

20.0 -

63.2

64.3

65.5

65.4

90,000

169,571

16.0

40.0

10.0 5.0 -

4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

Source: Company, Angel Research

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

Source: Company, Angel Research

Asset quality continues to be stable

During 4QFY2013, the asset quality for HDFC remained strong with the gross NPA ratio at 0.70%, which improved marginally from 0.75% reported in 3QFY2012 and 0.77% in 2QFY2013. The gross NPA ratio for individual portfolio stood at 0.58%, while that of non-individual portfolio at 0.92%. As of 4QFY2013, HDFC continues to maintain a 100% PCR. In fact, the company carries `286cr of excess provision over and above the regulatory requirement of `1,506cr.

Exhibit 5: NPA coverage remains at 100%

1,500 1,200 900 60.0 600 30.0
-

Exhibit 6: Gross NPA ratio improves sequentially

PCR (%, RHS) 120.0 100.0 90.0

Gross NPA (`cr) 100.0 100.0

Net NPA (`cr)

0.80 0.78 0.76 0.74 0.72 0.70

0.74

Gross NPA % (3 months)

100.0

100.0

0.79

0.77

0.75

1,069

1,190

1,206

1,224

300 -

1,199

0.66 0.64

4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

4QFY12

1QFY13

2QFY13

3QFY13

4QFY13

Source: Company, Angel Research

Source: Company, Angel Research

May 9, 2013

0.70

0.68

HDFC | 4QFY2013 Result Update

NII growth remains moderate

HDFCs NII rose by a moderate 13.6% yoy to `2,121cr. The spreads stood largely stable at 2.30% for FY2013 compared to 2.27% for FY2012, while the reported net interest margin grew sequentially by 11bp yoy to 4.2% during the year. Going ahead NIMs are likely to face modest pressures; on back of higher incremental lending to individuals (individual loans have lower spreads compared to nonindividual loans). However, with loan book growing at above industry CAGR of 20.0% over FY2013-15E, we expect the company to sustain healthy NII CAGR of 18.6% over the same period.

Exhibit 7: Spread at 2.30% for FY2013

(%)

Exhibit 8: NII yoy growth trend

2,400
2.30

Spreads

2.33 2.30 2.28 2.25 2.30 2.29 2.28 2.27 2.27 2.27 2.27

23.6

NII (`cr)

Growth yoy (%, RHS) 25.0

2,000 1,600 1,200 800

1,867 1,527

18.7

17.8

18.8 13.6

20.0 15.0 10.0

1,634

1,624

2,121

FY2012

9MFY12

1QFY12

1QFY13

9MFY13

1HFY12

1HFY13

FY2013

400 -

5.0 -

4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

Source: Company, Angel Research

Source: Company, Angel Research

Strong growth in non-interest income

For 4QFY2013, the profits on sale of investments grew strong by 32.7% yoy at `105cr. Fess and other charges also witnessed a strong growth of 46.5% yoy. Other income was higher by 83.6% yoy at `12cr.

Investment arguments
Robust loan sourcing and appraisal mechanism
The housing finance industry is a keenly competitive segment with banks having a significant presence. However, large housing finance companies, like HDFC, with a dedicated focus on the segment leading to robust loan-sourcing and appraisal as well as high credit rating enabling competitive cost of funds, should be able to withstand competition from banks, even going forward. The company also has one of the most well regarded top managements in the industry as well as a well established conservative risk management philosophy.

May 9, 2013

HDFC | 4QFY2013 Result Update

Consistency in performance
HDFC has witnessed a healthy growth in its loan portfolio, registering a CAGR of 17.3% over FY2009-13. During the period, HDFCs earnings have also witnessed an equally healthy 20.7% CAGR. These have been backed by the companys strong asset quality, low operating costs and ability to keep cost of funds on the lower side. During the last two years, HDFC has managed to clock a loan book CAGR of above 20%, despite a challenging growth environment. The loan growth to commercial segment has been on a declining trend (13.5% yoy as of FY2013 compared to 19.1% yoy as of FY2012) which has prompted HDFC to alter its loan mix further towards the individual loan category (~81% of incremental growth in loan advances in FY2013 were towards individual loan segment) to drive its credit growth. Going ahead NIMs are likely to face modest pressures; on back of higher incremental lending to individuals but HDFC is expected to maintain a similar healthy loan growth trajectory going ahead. Conservatively, we have factored in a loan book CAGR of 20% over FY2013-15E.

Outlook and valuation

At the current market price, HDFCs core business (after adjusting `271/share towards the value of its subsidiaries) is trading at 4.1x FY2015E ABV. We expect HDFC to post a healthy PAT CAGR of 17.9% over FY201315E. However, the stock is currently trading at 4.1x FY2015E ABV and at around 59% premium to the Sensex in P/E terms (compared to an average of 39.4% since FY2006). We consider the stock to be fairly valued and hence, recommend a Neutral rating on the stock.

Exhibit 9: Angel EPS forecast vs consensus

Year (`) FY2014E FY2015E
Source: Bloomberg, Angel Research

Angel forecast 37.0 43.6

Bloomberg consensus 36.7 42.8

Var. (%) 0.6 1.9

Exhibit 10: Change in estimates

Particulars (` cr) NII* Non-interest income Operating income Operating expenses Pre-prov. profit Provisions & cont. PBT Prov. for taxes PAT Earlier estimates
7,287 1,641 8,928 673 8,255 172 8,083 2,206 5,877

FY2014E FY2015E Revised Earlier Revised Var. (%) Var. (%) estimates estimates estimates
7,072 1,500 8,573 636 7,937 185 7,751 2,035 5,716 (2.9) (8.6) (4.0) (5.5) (3.9) 7.9 (4.1) (7.7) (2.7) 8,816 1,868 10,684 821 9,863 313 9,550 2,611 6,939 8,472 1,670 10,142 763 9,379 231 9,148 2,400 6,747 (3.9) (10.6) (5.1) (7.0) (4.9) (26.1) (4.2) (8.1) (2.8)

Source: Angel Research; Note* Core NII

May 9, 2013

HDFC | 4QFY2013 Result Update

Exhibit 11: P/ABV band

Price (`) 1,400 1,200 1,000 800 600 400 200 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13

3x

4x

5x

6x

7x

Source: Bloomberg, Angel Research;

Exhibit 12: P/E band

1,600 1,400 1,200 1,000 800 600 400 200 0
Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12
Sep-12

Price (`)

12x

20x

28x

36x

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Source: Bloomberg, Angel Research

Exhibit 13: HDFC Premium/Discount to the Sensex

(%)
80 70 60 50 40 30 20 10 0
Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Sep-11 Mar-12 Mar-13

Premium/Discount to Sensex

Avg. Historical Premium

Source: Bloomberg, Angel Research

May 9, 2013

Apr-13

HDFC | 4QFY2013 Result Update

Company Background
HDFC is India's leading housing finance company, with a balance sheet size of ~`2lakh cr. The company's primary business is to provide loans for the purchase or construction of residential houses. HDFC's distribution network spans 331 outlets, covering more than 81 locations across India. From its origins as a specialized mortgage company, HDFC has grown into a financial conglomerate with market leading group companies in banking, asset management and insurance.

Income statement (standalone)

Y/E March (` cr) NII - YoY Growth (%) Other Income - YoY Growth (%) Operating Income - YoY Growth (%) Operating Expenses - YoY Growth (%) Pre - Provision Profit - YoY Growth (%) Prov. & Cont. - YoY Growth (%) Profit Before Tax - YoY Growth (%) Prov. for Taxation - as a % of PBT PAT - YoY Growth (%) FY10 3,388 10.9 910 71.3 4,298 19.9 324 2.4 3,974 21.6 58 16.0 3,916 21.7 1,090 27.8 2,826 23.8 FY11 4,247 25.4 1,071 17.7 5,318 23.7 381 17.7 4,937 24.2 70 20.7 4,867 24.3 1,332 27.4 3,535 25.1 FY12 4,998 17.7 1,199 12.0 6,198 16.5 452 18.6 5,746 16.4 80 14.3 5,666 16.4 1,543 27.2 4,123 16.6 FY13 5,927 18.6 1,329 10.9 7,257 17.1 539 19.3 6,718 16.9 145 81.2 6,573 16.0 1,725 26.2 4,848 17.6 FY14E 7,072 19.3 1,500 12.9 8,573 18.1 636 18.0 7,937 18.1 185 27.9 7,751 17.9 2,035 26.3 5,716 17.9 FY15E 8,472 19.8 1,670 11.3 10,142 18.3 763 20.0 9,379 18.2 231 24.7 9,148 18.0 2,400 26.2 6,747 18.0

Balance sheet (standalone)

Y/E March (` cr) Share Capital Reserve & Surplus Loan Funds - Growth (%) Other Liabilities & Provisions Total Liabilities Investments Advances - Growth (%) Fixed Assets Other Assets Total Assets FY10 287 14,911 15.2 4,878 10,727 15.0 222 7,725 FY11 293 17,023 19.2 6,814 11,832 19.2 234 10,370 FY12 295 18,722 20.9 9,375 12,207 20.2 234 14,657 FY13 309 24,691 14.1 11,723 13,613 20.8 238 12,109 FY14E 309 27,488 27.0 3,516 14,693 20.0 286 14,530 FY15E 309 30,786 20.0 4,836 15,988 20.0 343 17,436

96,565 115,112 139,128 158,807 201,680 242,017

116,641 139,242 167,520 195,531 232,993 277,948 97,967 116,806 140,422 169,571 203,485 244,182

116,641 139,242 167,520 195,531 232,993 277,948

May 9, 2013

HDFC | 4QFY2013 Result Update

Ratio analysis (standalone)

Y/E March Profitability ratios (%) NIMs Cost to Income Ratio RoA RoE Asset Quality (%) Gross NPAs Net NPAs Provision Coverage Per Share Data (`) EPS ABVPS (75% cover.) DPS Valuation Ratios PER (x) P/ABVPS (x) DuPont Analysis NII (-) Prov. Exp. Adj. NII Treasury Int. Sens. Inc. Other Inc. Op. Inc. Opex PBT Taxes RoA Leverage RoE
#

FY10 3.4 7.5 2.6 20.0 0.80 0.13 83.7 19.7 105.9 7.2 44.7 8.3 3.3 0.1 3.2 0.2 3.4 0.6 4.0 0.3 3.7 1.1 2.6 12.0 31.6

FY11 3.6 7.2 2.9 21.7 0.77 100.0 24.1 118.1 9.0 36.5 7.5 3.5 0.1 3.5 0.3 3.8 0.5 4.3 0.3 4.0 1.1 2.9 14.2 40.8

FY12 3.6 7.3 2.7 22.7 0.76 100.0 27.9 128.8 11.0 31.5 6.8 3.4 0.1 3.4 0.2 3.6 0.5 4.1 0.3 3.8 1.1 2.7 14.4 39.3

FY13 3.6 7.4 2.7 22.0 0.71 100.0 31.4 161.7 12.5 28.1 5.4 3.4 0.1 3.3 0.2 3.5 0.5 4.0 0.3 3.7 1.0 2.7 12.6 33.5

FY14E 3.6 7.4 2.6 21.7 0.68 100.0 37.0 179.8 14.7 23.8 4.9 3.4 0.1 3.3 0.2 3.5 0.4 3.9 0.3 3.6 1.0 2.6 11.3 30.0

FY15E 3.6 7.5 2.6 22.9 0.65 100.0 43.6 201.1 17.4 20.2 4.4 3.4 0.1 3.3 0.2 3.5 0.4 3.9 0.3 3.6 1.0 2.6 11.6 30.3

Note: # Core RoEs excluding income and investments in subsidiaries

May 9, 2013

HDFC | 4QFY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

HDFC No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

May 9, 2013