>HDFC (RELIANCE Equities)

Growth revives but margins a tad lower

■ Early signs of revival in mortgage demand
After a dismal third quarter in which loan approvals declined 8% YoY as HDFC turned cautious on developer loans, approvals improved reasonably with 17% growth YoY. Net of sell-downs to HDFC Bank, outstanding loans grew by 17% YoY. Management has guided to an 18-20% loan growth target for FY10E (with most of the rise coming in the last two quarters).

■ Excess liquidity takes toll on margins. Other income surprises positively
In the aftermath of the domestic liquidity crunch during 2Q–3Q FY09, HDFC carried excess liquidity which took its toll on spreads (down 11 bps YoY). Going forward, spreads are expected to remain stable with an upward bias as repricing of liabilities kicks in.

■ Asset quality and operating efficiency remarkable as always
Despite market concerns, GNPA ratios (both 180 and 90-days past due) continued to improve YoY, a trend we have seen throughout the current fiscal.

■ Raising our target price to reflect greater comfort on demand
HDFC has delivered in a difficult environment: its asset quality is at a 10-year low, and spreads have been maintained showing negligible impact of SBI's lower interest rate loan gimmick. The only concern is on demand, though signs of a revival are evident. The stock currently trades at 15x earnings (sub-value at Rs 588.) Given this backdrop and HDFC’s sustainable core RoE (upwards of 25%), core business can trade upwards of 20x earnings. We upgrade our target price to Rs 2,378 from Rs 1,943. Buy.

To see ful report: HDFC