4QFY2012 Result Update | NBFC

May 8, 2012

HDFC
Performance Highlights

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

Source: Company, Angel Research

NEUTRAL
CMP Target Price
% chg (qoq) 45.4 37.2 35.2 4QFY11 1303 1579 1142 % chg (yoy) 29.0 17.1 16.1

`658 -

4QFY12 1,681 1,849 1,326

3QFY12 1,156 1,348 981

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

NBFC 97,285 1.1 732/601 341,664 2 16,546 5,000 HDFC.BO HDFC@IN

For 4QFY2012, HDFCs standalone net profit grew by 16.1% yoy, which was above our estimates mainly because of higher net interest income than estimated by us. We maintain our Neutral view on the stock. Loan growth remains healthy: For 4QFY2012, HDFCs loan book grew by healthy 19.9% yoy (up 6.2% qoq) to `140,422cr. Approvals in 4QFY2012 stood at `26,965cr (up 21.5% yoy), while disbursements stood at `21,335cr (up 15.9% yoy). For 4QFY2012, HDFCs NII increased by 29.0% yoy, as bank relied on term loans from banks (up 62.9% qoq) rather than short term borrowings for their funding requirements during 4QFY2012, bringing down its cost of funds (NIMs up by 115bp qoq during 4QFY2012 compared to 72bp in 4QFY2011). For 4QFY2012, the banks other income decreased by 23.0% yoy to `271cr due to lower fee income and lower income from sale of investments. HDFCs asset quality continued to be stable during 4QFY2012, with gross NPA ratio falling by 3bp yoy to 0.74%. On a six-month overdue basis, gross NPA ratio stood at 0.44%. Gross NPAs grew by 18.5% yoy to `1,069cr. HDFC continued to maintain a 100% provision-coverage ratio for 4QFY2012, similar to 3QFY2012. Outlook and valuation: At the CMP, HDFCs core business (after adjusting `226/share towards the value of its subsidiaries) is trading at 3.4x FY2014E ABV of `126.9 (including subsidiaries, the stock is trading at 3.7x FY2014E ABV of `178.7). We expect HDFC to post a healthy PAT CAGR of 18.7% over FY2012 14E. However, considering that the stock is currently trading at 4.1x one-year forward P/ABV and at a 35.8% premium to the Sensex in P/E terms (compared to an average of 31.1% over the last five years), we consider the stock to be fully valued and, hence, recommend Neutral on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 24.9 66.0 9.1

Abs. (%) Sensex HDFC

3m (6.6) (5.1)

1yr (10.7) (1.0)

3yr 39.3 89.2

Key financials
Y/E March (` cr) NII % chg Net profit % chg NIM (%) EPS (`) P/E (x) P/ABV (x) RoA (%) RoE (%)
Source: Company, Angel Research

FY2011 4,247 25.4 3,535 25.1 3.6 24.1 27.3 5.6 2.9 21.7

FY2012 4,998 17.7 4,123 16.6 3.6 27.9 23.6 5.1 2.8 22.7

FY2013E 5,909 18.2 4,855 17.8 3.5 31.7 20.8 4.2 2.7 22.4

FY2014E 7,004 18.5 5,809 19.7 3.4 37.9 17.4 3.7 2.6 22.5
Varun Varma 022 3935 7800 Ext: 6847 varun.varma@angelbroking.com

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

Sourabh Taparia
022 3935 7800 Ext: 6872 sourabh.taparia@angelbroking.com

Please refer to important disclosures at the end of this report

HDFC | 4QFY2012 Result Update

Exhibit 1: 4QFY2012 performance

Particulars (` cr)
Interest earned Interest expenses Net interest income 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 (%) Net NPA (%)
Source: Company, Angel Research

4QFY12 3QFY12 % chg (qoq) 4QFY11 % chg (yoy)

4,620 2,939 1,681 271 1,952 103 1,849 25 1,824 498 1,326 9.0 5.3 27.3 100.0 4,168 3,012 1,156 304 1,460 112 1,348 20 1,328 347 981 6.7 7.7 26.1 100.0 10.8 (2.4) 45.4 (10.8) 33.7 (7.9) 37.2 25.0 37.3 43.5 35.2 34.9 3,433 2,130 1,303 352 1,655 76 1,579 25 1,554 412 1,142 7.8 4.6 26.5 100.0 34.6 38.0 29.0 (23.0) 18.0 35.6 17.1 17.4 20.9 16.1 15.3

Exhibit 2: 4QFY2012 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 1,681 271 1,952 103 1,849 25 1,824 498 1,326

Estimates 1,502 365 1,867 89 1,778 23 1,755 488 1,267

% chg 11.9 (25.7) 4.6 15.1 4.0 9.8 4.0 2.1 4.7

May 8, 2012

HDFC | 4QFY2012 Result Update

Loan growth healthy; outlook remains strong

For 4QFY2012, HDFCs loan book grew by healthy 19.9% yoy (up 6.2% qoq) to `140,422cr. Approvals in 4QFY2012 stood at `26,965cr (up 21.5% yoy), while disbursements stood at `21,335cr (up 15.9% yoy). We expect approvals and disbursements to continue growing at a similar pace in the coming quarters and have factored in loan growth of 22% for both FY2013 and FY2014.

Exhibit 3: Approvals and disbursements 4QFY2012

30,000 25,000 20,000 15,000 10,000 Loan Approvals (`cr) Loan Disbursements (`cr)

Exhibit 4: Loan book growth healthy in 4QFY2012

150,000 130,000 110,000 90,000 70,000 19.6 19.5 19.9 Advances (`cr) 22.2 Growth (qoq, %) 21.2 24.0 22.0 20.0 18.0 16.0

117,127

124,168

126,992

132,208

5,000 -

50,000 30,000

140,422

22,200

18,410

19,520

12,960

23,786

20,740

19,883

16,078

26,965

21,335

14.0 12.0

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

Source: Company, Angel Research

Source: Company, Angel Research

Asset quality remains stable

HDFCs asset quality continued to be stable during 4QFY2012, with gross NPA ratio falling by 3bp yoy to 0.74%. On a six-month overdue basis, gross NPA ratio stood at 0.44%. Gross NPAs grew by 18.5% yoy to `1,069cr. HDFC continued to maintain a 100% provision-coverage ratio for 4QFY2012, similar to 3QFY2012.

Exhibit 5: 100% NPA coverage for 3QFY2012

Gross NPA (`cr) 1,200 100.0 900 100.0 Net NPA (`cr) 100.0 100.0 PCR (%, RHS) 120.0 100.0 90.0

Exhibit 6: Asset quality remains stable

0.90 0.80 0.70 0.60 0.50 Gross NPA % (6 months) Gross NPA % (3 months)

600

60.0

0.40 0.30

1,031

1,063

1,109

1,069

300

30.0

0.20

0.46

0.77

0.55

0.83

0.53

0.82

0.53

0.82

0.44

902

0.10

4QFY11 1QFY12 2QFY12 3QFY12 4QFY12

4QFY11 1QFY12 2QFY12 3QFY12 4QFY12

Source: Company, Angel Research

Source: Company, Angel Research

May 8, 2012

0.74

HDFC | 4QFY2012 Result Update

NII remains subdued as spreads see a marginal decline

HDFCs NII increased by 29.0% yoy, as bank relied on term loans from banks (up 62.9% qoq) rather than short term borrowings for their funding requirements during 4QFY2012, bringing down its cost of funds (NIMs up by 115bp qoq during 4QFY2012 compared to 72bp in 4QFY2011). The spread on loans over the cost of borrowings stood at 2.27% for FY2012 compared to 2.33% for FY2011. We expect HDFC to deliver NII growth of 18.2% and 18.5% for FY2013 and FY2014, respectively.

Exhibit 7: Spread at 2.27% for FY2012

(%) 2.40 2.34 2.31 2.30 2.34 2.33 2.33 2.30 2.29 2.27 2.27

Exhibit 8: NII yoy growth trend

1,800 1,500 1,200 900 600 15.5 11.3 14.1

NII (`cr)

Growth yoy (%, RHS)

29.0

35.0 30.0 25.0 20.0

12.5

15.0 10.0

1,303

1,164

1,156

1HFY11

1HFY12

FY2012

FY2011

9MFY11

1QFY11

1QFY12

9MFY11

FY2012

4QFY11 1QFY12 2QFY12 3QFY12 4QFY12

998

2.20

300

1,681

5.0 -

Source: Company, Angel Research

Source: Company, Angel Research

Fee income remains sluggish

For 4QFY2012, the banks other income decreased by 23.0% yoy to `271cr due to lower fee income and lower income from sale of investments. Fee income was down 23.6% yoy while profit on sale of investments was lower by 40.8% yoy. We have factored in a non-interest income growth of 12.0% yoy and 23.8% yoy for FY2013 and FY2014, respectively

Exhibit 9: Sequential drop in non-interest income

Particulars (` cr) - Surplus from MFs - Dividend Income - Fees & other charges - Other operating income - Other income - Profit on sale of investments Total Source: Company, Angel Research 4QFY12 63 62 60 2 6 79 271 3QFY12 81 53 72 5 5 88 304 % chg (qoq) 4QFY11 (22.4) 16.0 (16.8) (66.2) 23.6 (10.1) (10.8) 68 57 79 4 11 134 352 % chg (yoy) (8.3) 7.0 (23.6) (49.5) (41.0) (40.8) (23.0)

May 8, 2012

HDFC | 4QFY2012 Result Update

Investment arguments
Robust loan sourcing and appraisal 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. Consistency in performance HDFC has witnessed healthy growth in its loan portfolio, registering a CAGR of 20.9% over FY2006-12. During the period, HDFCs earnings have also witnessed an equally healthy 21.9% CAGR. This has been backed by the companys strong asset quality, low operating costs and ability to keep cost of funds on the lower side. We expect HDFCs loan book to grow at 22% over FY2012-14, resulting in earnings CAGR of 18.7% and an average core RoE of 33.3% over the same period.

Outlook and valuation

At the CMP, HDFCs core business (after adjusting `226/share towards the value of its subsidiaries) is trading at 3.4x FY2014E ABV of `126.9 (including subsidiaries, the stock is trading at 3.7x FY2014E ABV of `178.7). We expect HDFC to post a healthy PAT CAGR of 18.7% over FY201214E. However, considering that the stock is currently trading at 4.1x one-year forward P/ABV and at a 35.8% premium to the Sensex in P/E terms (compared to an average of 31.1% over the last five years), we consider the stock to be fully valued and, hence, recommend Neutral on the stock.

Exhibit 10: Angel EPS forecast vs. consensus

Year (`) FY2013E FY2014E Angel forecast 31.7 37.9 Bloomberg consensus 32.4 38.2 Var. (%) -2.2 -0.7

Source: Bloomberg, Angel Research

May 8, 2012

HDFC | 4QFY2012 Result Update

Exhibit 11: Change in estimates

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

FY2013 FY2014 Earlier Revised Earlier Revised Var. (%) Var. (%) estimates estimates estimates estimates
5,660 1,584 7,244 526 6,718 151 6,567 1,801 4,767 5,909 1,485 7,393 551 6,842 168 6,674 1,820 4,855 4.4 (6.3) 2.1 4.8 1.8 11.2 1.6 1.1 1.8 6,670 1,956 8,625 610 8,015 174 7,842 2,153 5,689 7,004 1,840 8,844 651 8,194 204 7,990 2,181 5,809 5.0 (5.9) 2.5 6.6 2.2 17.4 1.9 1.3 2.1

May 8, 2012

HDFC | 4QFY2012 Result Update

Exhibit 12: P/ABV band

Price (`) 1,400 1,200 1,000 800 600 400 200 3x 4x 5x 6x 7x

Dec-06

Aug-08

Dec-11

Apr-05

Apr-10

Jul-06

Jul-11

Mar-08

Nov-09

May-07

Source: Bloomberg, Angel Research;

Exhibit 13: P/E band

1,400 1,200 1,000 800 600 400 200 0 Price (`) 12x 20x 28x 36x

Oct-07

Feb-06

Sep-05

Nov-09

Feb-11

Sep-10

May-12

May-07

Source: Bloomberg, Angel Research

Exhibit 14: HDFC Premium/Discount to the Sensex

(%)
80 70 60 50 40 30 20 10 0 Premium/Discount to Sensex Avg. Historical Premium

Oct-06

Feb-09

May-07

Nov-10

Dec-07

Sep-09

Jun-11

Source: Bloomberg, Angel Research

May 8, 2012

Mar-06

Apr-10

Jan-12

Jul-08

May-12

Jun-09

Dec-06

Mar-08

Aug-08

Dec-11

Jan-09

Jul-06

Apr-05

Apr-10

Jul-11

Mar-13

Oct-07

Feb-06

Sep-05

Feb-11

Sep-10

Oct-12

Jan-09

Jun-09

HDFC | 4QFY2012 Result Update

Income statement
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 (%) FY09 3,054 17.5 531 (51.3) 3,585 (2.8) 316 11.4 3,269 (4.0) 50 56.3 3,219 (4.6) 937 29.1 2,283 (6.3) 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 14.2 5,666 16.4 1,543 27.2 4,123 16.6 FY13E 5,909 18.2 1,485 23.8 7,393 19.3 551 22.0 6,842 19.1 168 109.9 6,674 17.8 1,820 27.3 4,855 17.8 FY14E 7,004 18.5 1,840 23.9 8,844 19.6 651 18.0 8,194 19.8 204 21.4 7,990 19.7 2,181 27.3 5,809 19.7

Balance sheet
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 FY09 284 12,853 83,856 21.3 4,663 10,469 85,198 16.2 203 5,787 FY10 287 14,911 15.2 4,878 10,727 15.0 222 7,725 FY11 293 17,023 19.5 6,775 11,832 19.6 234 10,309 FY12 295 18,722 20.6 9,375 12,207 19.9 234 14,657 FY13E 306 23,974 27.0 1,680 13,154 22.0 278 17,882 FY14E 306 27,061 21.5 2,128 13,085 22.0 338 21,693

96,565 115,410 139,128 176,669 214,623

101,657 116,641 139,502 167,520 202,629 244,119 97,967 117,127 140,422 171,314 209,004

101,657 116,641 139,502 167,520 202,629 244,119

May 8, 2012

HDFC | 4QFY2012 Result Update

Ratio analysis
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 3.4 0.1 3.3 0.0 3.4 0.4 3.8 0.4 3.5 1.0 2.4 9.6 23.2 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 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 3.4 0.1 3.4 0.2 3.6 0.6 4.1 0.3 3.8 1.1 2.8 14.2 39.4 3.3 0.1 3.2 0.1 3.4 0.6 4.0 0.3 3.7 1.0 2.7 12.9 34.7 3.25 0.09 3.16 0.13 3.29 0.67 3.96 0.30 3.66 1.01 2.64 12.0 31.8 41.0 7.1 33.4 6.2 27.3 5.6 23.6 5.1 20.8 4.2 17.4 3.7 16.0 6.0 19.7 7.2 24.1 9.0 27.9 11.0 31.7 158.5 12.2 37.9 178.7 14.7 92.4 105.9 118.1 128.8 0.82 0.09 88.6 0.80 0.13 0.77 0.74 0.70 100.0 0.65 100.0 3.5 8.8 2.4 18.2 3.4 7.5 2.6 20.0 3.6 7.2 2.9 21.7 3.6 7.3 2.8 22.7 3.5 7.5 2.7 22.4 3.4 7.4 2.6 22.5 FY09 FY10 FY11 FY12 FY13E FY14E

83.7 100.0 100.0

Note: # Core RoEs excluding income and investments in subsidiaries

May 8, 2012

HDFC | 4QFY2012 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 8, 2012

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