HDFC rating: Buy — Earnings reflected dull realty sentiment

Asset growth, likely to be soft for two quarters, will revive faster than peers; company to consolidate its positioning; ‘Buy’ retained.

HDFC’s Q4FY20 earnings reflect dampened sentiment in real estate sector. Two elements of surprise are: (i) rise in stage-3 assets to 2.3% (from 1.6% in Q3FY20) coupled with spike in stage-2 assets as well to 5.5% (from 4.7% in Q3FY20) – contrary to stable-to-declining GNPL trend for other financiers. Possibly, this was due to identification of a few accounts as ‘stress’ (though technically not NPL); (ii) moratorium at 26% of AUM (21% for individual and >40% for non-individual loans) seems higher given the profile of customers/ assets.

Earnings were down primarily due to provisioning and absence of dividend income. However, >30% coverage on stage-2&3 assets, comfortable liquidity, improving NIMs at 3.4%, and operating profit at >3% of assets provide comfort on earnings stability. Also, HDFC will consolidate its positioning given balance sheet strength and ability to work with developers to find resolutions. Maintain Buy with an SoTP-based target price of Rs 2,345 (unchanged).

Rise in stage-2 & 3 assets
Despite moratorium, stage-3 assets rose ~70bps to 2.3% due to rise in individual GNPLs by ~25bps to 1%, and non-individual book by ~180bps to 4.7%. Stage-2 assets, even on elevated levels of Q3FY20, further rose to 5.5% (suggesting trend will linger for a while). Considering the dampened real estate sentiment, we conservatively model credit costs of 1.2% in FY21E.

Leaders with strong liability franchise are better positioned
HDFC is comfortably accessing the debt market and availing bank loans as well. It can work closely with developers right through to project completion, assist them in improving sales and achieve reasonable resolution in any exposures that become stressed.

Asset growth moderation to stay for two quarters, but can revive fast
Loan growth moderated sharply to 11% (from 14.5% in Q3FY20) due to loss of business in March and sell-downs. Business in April and May has been muted amidst lockdown and, with 74% customers honouring commitments, loan growth in near term will further moderate. However, it should revive faster than its peers as the situation normalises. Benefit on funding cost could help sustain NIMs at 3.2-3.4% levels.