>HDFC {Housing Development Finance Corporation} (KR CHOKSEY)

INVESTMENT RATIONALE
HDFC reported net profit of Rs. 733.4 Crore during Q4FY09 in line with our expectations. During Q4FY09 bank reported a net profit of Rs. 733.4 Crore as compared to Rs.566.1 Crore in Q4FY08 a increase of 29.5% (y-o-y). Key triggers for banks are Net Interest Margins improved incrementally to 2.21% for FY09 from 2.19% for 9MFY09 on back of lower funding costs. CP rates, a proxy for wholesale funding costs in India, have been trending down on account of comfortable liquidity environment and decreasing risk aversion. HDFC has been incrementally shifting its borrowings to the wholesale markets from deposits to benefit from the declining rates. HDFC strategy continues to be to hold onto margins as it has not followed SBI’s aggressive pricing strategy in home loans.

Key Developments
• Interest Income increased 3.8% q-o-q and 31% y-o-y to Rs 2935 crores
• Interest Expense increased 1% q-o-q and 51.8% y-o-y to Rs 2064.1 crores
• Net Interest Income increased 10.9% q-o-q and decreased 1.1% y-o-y to Rs 870.9 crores driven by fees from real estate funds and the AMC business
• Disbursement growth was 17.5% YoY for Q4FY09 while approvals grew 16.8% YoY during Q4FY09.
• Corporate loan growth at 24.8% YoY was higher than individual loan growth of 13.5% as returns continue to be high in this segment
• HDFC sold loans worth Rs 4250 crores during the year to various institutions, primarily HDFC Bank.
• Non Interest Income increased 125.7% q-o-q to Rs 218.6 crores during Q4FY09
• Asset quality improved with gross NPAs declining from ~1.1% in Q3FY09 to ~0.8% in Q4FY09

Healthy Business Growth
The total business has grown by 20% to Rs. 96,993 crore in Q4FY09 as compared to Rs.81,099 Crore during Q4FY08. Advances have grown by 16% to Rs.85,198 crore in Q4FY09 as compared to Rs.73,328 Crore during Q4FY08 and deposits grew by 21% to Rs.83,856 Crore in Q4FY09 as compared to Rs.69,151 Crore during Q4FY08. Advances grew on the back of strong retail loan book which now constitute 73% of the banks advances while deposits grew on the back of huge demand for Term Deposits which stood at Rs.25,371 Crore in Q4FY09 as compared
to Rs. 21,200 Crore in Q4FY08.

Valuations
At current price of Rs 2345 the stock is trading at 4.33x FY10E BV of Rs. 541 and 26.05x FY10E EPS of Rs. 90. We believe that housing demand will improve in H209 due to better affordability,
leading to a 18 – 20% y-o-y pickup in disbursements (high loan approvals and disbursements in Q4FY09 demonstrates HDFCs ability to withstand stiff competitions from public sector banks); Net Interest Margins will improve as borrowing rates, especially in the wholesale markets, will remain low on account of benign liquidity conditions; income from real estate fund management fees and asset management (HDFC MF) will remain an earnings driver in FY10;strong asset
quality will reduce earnings pressure.

To see full report: HDFC