July 30, 2018 1

Rating: BUY | CMP: Rs2,029 | TP: Rs2,287

IND-AS transition dampens performance

Quick Pointers

New disclosure under IND-AS shows stress assets (gross stage 3) at 3.7%

including weak standard accounts of 2.5% of loans – page 2

Positive flow through has been lower while charge on opex from ESOPs & CSR

has seen higher bearing on earnings than expectations

HDFC’s loan asset growth of 19% YoY was better than expectations of 18%

YoY driven from both individual & non-individual but same was visible in NII

growth of 21% YoY as (i) impact from IND-AS accounting on interest

expenses (Rs1.1bn of impact) and (ii) slightly lower spreads on individual

loan book. HDFC under the IND-AS accounting recognized certain weak

standard assets under the Gross Stage 3 exposure (2.5% of assets) leading

to utilizing the floating provisions to maintain PCR at 28%. The standard

stressed assets remain paying in HDFC Ltd book, but either is financially

weak or NPAs in other institutions. Additional disclosures are slightly

negative but given strong capabilities, we don’t see large risks. We see slight

spread pressure in near term but HDFC has already taken increase in PLRs

keeping spreads in tight band and asset growth is expected to be better.

Maintain BUY with TP of Rs2,287 (up from Rs2,228) based on SOTP valuation

with HDFC valued at 2.9x.

Slower operational performance under IND-AS: NII growth was lower at

21% YoY (PLe: 27% YoY) as borrowing costs increased (lower under IND-AS

last year) despite some gains on investment income and slight spreads coming

off in the quarter by 1bps to 2.28% mainly in individual book. Management

expects spreads to improve as increase in rates should benefit eventually on

both individual & non-individual. Operating performance (adjusting to dividend

income) was also impacted from CSR expenses recognized from P&L and

ESOPs valued at market price compared to last year (under IND-AS).

Improvement in assets growth: Loan growth was up 19% YoY as individual

loan continued to benefit from lower base and improvement in volumes

especially in lower ticket size. Non individual loan book also grew well at 18%

YoY but improved lending towards LRD assets. Spreads improved in the non-

individual book by 4bps QoQ to 3.14% as HDFC took rate hikes much earlier

on this segment, while individual book spreads were at 1.91% down 1bp QoQ

on lag in pricing of loans for legacy portfolio.

Increase in stress assets slight negative: Under the IND-AS disclosures,

HDFC recognized additional 2.5% of assets as weak standard accounts from

both individual & wholesale book, which is slightly higher, in our view. These

accounts are paying but HDFC has seen weaknesses in these accounts and

hence exposure at default (EAD) was at 3.7% of loans v/s GNPA of 1.18%

(which is included in EAD) leading to utilization of floating provisions.

Assumptions for LGDs on individual book was assumed at 8.3% and 21.9% on

non-individual book.

HDFC (HDFC IN)

July 30, 2018

Q1FY19 Result Update ☑ Change in Estimates | ☑ Target | Reco

Change in Estimates Current Previous FY19E FY20E FY19E FY20E Rating BUY BUY Target Price 2,287 2,228 NII (Rs.) 133,225 158,043 135,686 162,112

% Chng. (1.8) (2.5)

PPoP (Rs.) 153,126 177,636 153,333 179,749

% Chng. (0.1) (1.2)

EPS (Rs.) 40.1 46.2 40.4 47.4

% Chng. (0.9) (2.5)

Key Financials FY17 FY18 FY19E FY20E Net Int. Inc. 99,540 111,797 133,225 158,043

Growth (%) 14.5 12.3 19.2 18.6

Op. Profit 114,267 170,458 153,126 177,636

PAT 74,427 121,209 102,875 118,622

EPS (Rs.) 30.1 47.5 40.1 46.2

Gr. (%) 1.0 57.8 (15.7) 15.3

DPS (Rs.) - - - -

Yield (%) - - - -

Margin (%) 4.3 4.2 4.2 4.3

RoAE (%) 20.2 24.0 15.3 15.5

RoAA (%) 2.4 3.3 2.4 2.4

PE (x) 67.3 42.7 50.6 43.9

P/BV (x) 12.7 8.4 7.2 6.5

P/ABV (x) 13.5 9.0 7.0 6.4

Key Data HDFC.BO | HDFC IN 52-W High / Low Rs.2,053 / Rs.1,638

Sensex / Nifty 37,494 / 11,320

Market Cap Rs.3,428bn/ $ 49,916m

Shares Outstanding 1,690m

3M Avg. Daily Value Rs.9601.67m

Shareholding Pattern (%) Promoter’s -

Foreign 72.89

Domestic Institution 16.01

Public & Others 11.10

Promoter Pledge (Rs bn)

Stock Performance (%) 1M 6M 12M

Absolute 6.3 4.7 13.6

Relative 0.4 0.6 (2.1)

Pritesh Bumb

priteshbumb@plindia.com | 91-22-66322232

R Sreesankar rsreesankar@plindia.com | 91-22-66322214

Vidhi Shah

vidhishah@plindia.com | 91-22-66322242

HDFC

July 30, 2018 2

Under IND-AS, HDFC has classified assets based on Exposure at Default:

Stage 1: Performing Assets

Stage 2: Under Performing Assets

Stage 3: (a) Performing but identified as assets having some degree of stress;

(b): Non-Performing Assets

Exhibit 1: Stage 3 exposure at Default has come off QoQ under IND-AS

Exposure at Default (EAD) % Q1FY19 Q1FY18 Chg. YoY

Q4FY18 Chg. QoQ

Stage 1 94.76% 94.90% (14)bps 94.17% 59bps

Stage 2 1.54% 2.50% (96)bps 1.48% 6bps

Stage 3 (a): Standard, stressed assets 2.52% 1.49% 103bps 3.24% (72)bps

Stage 3 (b): Non Performing Loans 1.18% 1.11% 7bps 1.11% 7bps

Total Stage 3 EAD 3.70% 2.60% 110bps 4.35% 65bps Total

Source: Company, PL

Exhibit 2: Utilized floating provisions for considering the standard stressed

assets Asset Quality as per IND AS (Rs mn) Q1FY19 Q1FY18 Chg. YoY

Gross Stage 3 138,660 82,220 68.6%

ECL Provision Stage 3 38,630 23,960 61.2%

Net Stage 3 100,030 58,260 71.7%

Coverage Ratio% Stage 3 28% 29% -1.0%

Gross Stage 1 & 2 3,607,380 3,083,010 17.0%

ECL Provision Stage 1 & 2 5,650 5,860 -3.6%

Net Stage 1 & 2 3,611,730 3,077,150 17.4%

ECL Provision % Stage 1 & 2 0.16% 0.19% 0.0%

Source: Company, PL

HDFC Ltd disclosed the Stage 3

Standard but stressed asset which

was at 2.5% v/s 1.49% YoY but has

come off significantly

Total EAD on stage 3 is 3.70% on

portfolio basis

The NPAs have slightly deteriorated

As gross stage 3 assets increased,

HDFC utilized the floating provisions

on these weak standard assets to

maintain its PCR at 28%.

HDFC

July 30, 2018 3

Exhibit 3: Q1FY19 Financials – IND-AS accounting impacts NII & opex leads

to lower than expected earnings IND-AS IND-AS I-GAAP

P&L (Rs m) Q1FY19 Q1FY18 YoY gr. (%) Q4FY18 QoQ gr. (%)

Interest on advances 88,588 77,570 14.2 85,415 3.7

Other interest income 4,410 4,265 3.4 3,804 15.9

Total interest income 92,999 81,835 13.6 89,219 4.2

Interest expense 63,527 57,543 10.4 57,109 11.2

Net Interest Income 29,472 24,292 21.3 32,110 (8.2)

Capital Gains 2 18 (88.0) 3,006 (99.9)

Total other income 6,519 1,047 522.9 4,177 56.1

Total income 35,993 25,357 41.9 39,293 (8.4)

Operating expenses 5,096 3,497 45.7 2,321 119.6

-Staff expenses 3,243 2,075 56.3 959 238.0

-Other expenses 1,853 1,422 30.3 1,361 36.1

Operating profit 30,897 21,860 41.3 36,972 (16.4)

Core operating profit 30,895 21,841 41.5 33,966 (9.0)

Total provisions 197 1,636 (88.0) 1,800 (89.1)

Profit before tax 30,700 20,224 51.8 35,172 (12.7)

Tax 8,800 5,979 47.2 6,710 31.1

Profit after tax 21,900 14,245 53.7 28,462 (23.1)

Balance Sheet (Rs m)

Loan composition 3,719,880 3,135,730 18.6 3,594,420 3.5

-Individual loans (%) 69.1 68.8 70.0

-Corporate loans (%) 29.3 29.6 28.5

- Others (%) 1.6 1.5 1.6

Borrowings composition 3,325,260 2,863,750 16.1 3,206,560 3.7

-Term loans (%) 16.0 11.6 14.6

-Bonds/ Deb./ CPs (%) 54.1 58.6 56.6

-Deposits (%) 29.9 29.8 28.8

Ratios (%)

Spreads (Cumulative) 2.28 2.29 (1) 2.29 (1)

- Individual Loan Spreads 1.91 1.90 1 1.92 (1)

- Non-individual Loan Spreads 3.14 3.18 (4) 3.10 4

NIMs 3.50 3.40 10 4.00 (50)

Asset quality

Gross NPL 1.2 1.1 6 1.1 7

Coverage ratio 33.0 26.4 661 31.9 114

Others / Ratios

Cost-income ratio 14.2 13.8 37 5.9 825

Tier-I 15.0 12.1 290 17.3 (230)

Source: Company, PL

Note – QoQ numbers not comparable

HDFC

July 30, 2018 4

Exhibit 4: Overall loan growth contributed from both

individual & non-individuals

0%

5%

10%

15%

20%

25%

30%

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

Individual loan gr YoY Non-Individual loan gr YoY

Source: Company, PL

Exhibit 5: Loan mix broadly remains towards individual

lending

68%

68%

69%

68%

69%

70%

70%

71%

70%

70%

69%

69%

69%

69%

69%

70%

69%

31%

30%

30%

30%

30%

29%

29%

28%

29%

28%

29%

29%

30%

30%

29%

28%

29%

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

Individuals Corporates Others

Source: Company, PL

Exhibit 6: Deposit share moves up on mobilization

28%

29%

30%

31%

32%

33%

34%

35%

36%

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

Deposits Share

Source: Company, PL

Exhibit 7: Post some reclassification Bond mix is up

0%

20%

40%

60%

80%

100%

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

Term loans Bonds Deposits

Source: Company, PL

Exhibit 8: Overall spreads very marginally weaker

2.25%

2.27%

2.29%

2.31%

2.33%

2.35%

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

4.2%

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

NIM Spread Profile (RHS)

Source: Company, PL

Note –Q1FY18 & Q1FY19 on IND-AS

Exhibit 9: Spreads slightly came off in individual book

1.80%

2.00%

2.20%

2.40%

2.60%

2.80%

3.00%

3.20%

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

Spread - Individual Biz Spread - Non-Individual Biz

Source: Company, PL

HDFC

July 30, 2018 5

Exhibit 10: Slight movement upwards in GNPLs…

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

1.1%

1.2%

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

Net NPLs Gross NPLs

Source: Company, PL

Exhibit 11: …both in individual and non-individual

0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%2.0%2.2%2.4%2.6%

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

Gross NPL - Individual Gross NPL - Non Individual

Source: Company, PL

Exhibit 12: Earnings Change Table – We factor in slightly weaker spreads,

higher opex from CSR & ESOPs and HDFC AMC stake sale gain

(Rs mn) Old Revised % Change

FY19E FY20E FY19E FY20E FY19E FY20E

Net interest income 135,638 161,981 133,225 158,043 (1.8) (2.4)

Operating profit 152,233 178,439 153,126 177,636 0.6 (0.4)

Net profit 103,082 120,813 102,875 118,622 (0.2) (1.8)

EPS (Rs) 60.9 70.6 60.7 69.3 (0.2) (1.8)

ABVPS (Rs) 425.5 470.5 425.4 469.1 (0.0) (0.3)

Price target (Rs) 2,228 2,287 5.5

Recommendation BUY BUY

Source: Company, PL

Exhibit 13: SOTP valuation table based on Mar-20

HDFC SOTP valuation Stake (%)

Value per

share (Rs)

Basis

HDFC Parent (A) 1,222 Avg. of EVA and two-stage GGM, 2.9x P/ABV & 17.6x P/E Mar-20E

Subsidiaries / Associates

HDFC Bank 21.0 831 Value of stake in HDFC Bank as per our fair value

Life insurance 51.9 252 Appraisal value & NBP

AMC 53.3 66 6.0% of AUM

General Insurance 50.9 16 20x forward earnings

Others 89

Total subs/associates (B) @10% discount 1,065 Fair value (A+B) 2,287 Contribution of subs to total (%) 47

Source: Company, PL

HDFC

July 30, 2018 6

Exhibit 14: We revise our TP upwards to Rs2,287 (from Rs2,228) mainly on

increase from HDFC Bank valuations PT calculation and upside Fair price - EVA 1,228

Fair price - P/ABV 1,216

Average of the two 1,222 Target P/ABV 2.9 Target P/E 17.6 Value of subs/associates 1,065

Fair value of consol. entity 2,287 Current price, Rs 2,028

Upside (%) 13% Dividend yield (%) 1%

Total return (%) 14%

Source: PL Research

Exhibit 15: HDFC Ltd – 1 year forward P/ABV trends

3.5

4.0

4.5

5.0

5.5

6.0

Jul-12

Oct-12

Jan-1

3

Apr-

13

Jul-13

Oct-13

Jan-1

4

Apr-

14

Jul-14

Oct-14

Jan-1

5

Apr-

15

Jul-15

Oct-15

Jan-1

6

Apr-

16

Jul-16

Oct-16

Jan-1

7

Apr-

17

Jul-17

Oct-17

Jan-1

8

Apr-

18

Jul-18

P/ABV 3 yr avg. avg. + 1 SD avg. - 1 SD

Source: Company, PL

HDFC

July 30, 2018 7

Income Statement (Rs. m)

Y/e Mar FY17 FY18 FY19E FY20E

Int. Inc. / Opt. Inc. 308,502 337,246 399,126 470,281

Interest Expenses 208,962 225,449 265,901 312,238

Net interest income 99,540 111,797 133,225 158,043 Growth(%) 14.5 12.3 19.2 18.6

Non-interest income 23,095 69,122 33,817 35,102

Growth(%) (20.0) 199.3 (51.1) 3.8

Net operating income 122,634 180,918 167,041 193,145

Expenditures

Employees 3,888 5,175 7,606 8,518

Other Expenses 3,920 4,804 5,837 6,593

Depreciation 560 482 473 397

Operating Expenses 8,368 10,460 13,915 15,509

PPP 114,267 170,458 153,126 177,636

Growth(%) 5.6 49.2 (10.2) 16.0

Provisions 7,000 20,300 5,105 6,957

Profit Before Tax 107,267 150,158 148,021 170,679

Tax 32,840 28,949 45,146 52,057

Effective Tax rate(%) 30.6 19.3 30.5 30.5

PAT 74,427 121,209 102,875 118,622 Growth(%) 4.9 62.9 (15.1) 15.3

Balance Sheet (Rs. m)

Y/e Mar FY17 FY18 FY19E FY20E

Source of funds

Equity 3,177 3,352 3,424 3,424

Reserves and Surplus 392,766 610,674 724,761 799,695

Networth 395,943 614,025 728,184 803,119

Growth (%) 16.2 55.1 18.6 10.3

Loan funds 2,797,322 3,199,121 3,721,765 4,329,143

Growth (%) 17.7 14.4 16.3 16.3

Deferred Tax Liability - - - -

Other Current Liabilities 120,792 127,520 133,896 140,591

Other Liabilities 25,125 52,742 55,379 58,148

Total Liabilities 3,339,182 3,993,409 4,639,225 5,331,000 Application of funds Net fixed assets 6,423 6,445 6,767 7,038

Advances 2,957,338 3,594,420 4,259,698 5,016,862

Growth (%) 14.3 21.5 18.5 17.8

Investments 204,101 305,325 265,233 291,259

Current Assets 116,124 55,057 74,723 (17,618)

Net current assets (4,668) (72,463) (59,173) (158,209)

Other Assets 55,706 32,161 32,804 33,460

Total Assets 3,339,693 3,993,408 4,639,225 5,331,000 Growth (%) 16.0 19.6 16.2 14.9

Business Mix

AUM 2,477,288 2,907,863 3,366,192 3,983,849

Growth (%) 17.5 17.4 15.8 18.3

On Balance Sheet - - - -

% of AUM - - - -

Off Balance Sheet - - - -

% of AUM - - - -

Profitability & Capital (%)

Y/e Mar FY17 FY18 FY19E FY20E

NIM 4.3 4.2 4.2 4.3

ROAA 2.4 3.3 2.4 2.4

ROAE 20.2 24.0 15.3 15.5

Source: Company Data, PL Research

Quarterly Financials (Rs. m)

Y/e Mar Q2FY18 Q3FY18 Q4FY18 Q1FY19

Int. Inc. / Operating Inc. 81,449 84,744 89,219 92,999

Income from securitization - - - -

Interest Expenses 55,341 55,457 57,109 63,527

Net Interest Income 26,108 29,287 32,110 29,472 Growth (%) 13.7 13.7 12.6 21.3

Non-Interest Income 6,161 38,960 7,183 6,521

Net Operating Income 32,269 68,247 39,293 35,993 Growth (%) 12.9 138.4 19.9 41.9

Operating expenditure 2,130 2,274 2,196 4,966

PPP 30,021 65,852 36,972 30,897 Growth (%) (16.1) (14.9) (8.6) 9.4

Provision 950 950 1,800 197

Exchange Gain / (Loss) - - - -

Profit before tax 29,071 64,902 35,172 30,700

Tax 8,060 8,200 6,710 8,800

Prov. for deferred tax liability - - - -

Effective Tax Rate 27.7 12.6 19.1 28.7

PAT 21,011 56,702 28,462 21,900 Growth 15 233 39 54

AUM

3,702,556

3,857,27

8

3,983,84

9

4,161,84

9

YoY growth (%) 19.0 - 18.3 16.2

Borrowing

3,002,960

3,079,78

0

3,199,12

1

3,325,26

0

YoY growth (%) 17.5 16.9 14.8 16.1

Key Ratios

Y/e Mar FY17 FY18 FY19E FY20E

CMP (Rs) 2,029 2,029 2,029 2,029

EPS (Rs) 30.1 47.5 40.1 46.2

Book value (Rs) 160 241 284 313

Adj. BV(Rs) 151 225 289 318

P/E(x) 67 43 51 44

P/BV(x) 13 8 7 6

P/ABV(x) 13 9 7 6

DPS (Rs) - - - -

Dividend Payout Ratio(%) 7.5 31.2 40.1 36.8

Dividend Yield(%) - - - -

Asset Quality

Y/e Mar FY17 FY18 FY19E FY20E

Gross NPAs(Rs m) 23,363 40,258 30,670 34,616

Net NPA(Rs m) 15,983 27,432 (8,972) (9,199)

Gross NPAs to Gross Adv.(%) 0.8 1.1 0.7 0.7

Net NPAs to net Adv.(%) 0.5 0.8 (0.2) (0.2)

NPA coverage(%) 31.6 31.9 129.3 126.6

Du-Pont

Y/e Mar FY17 FY18 FY19E FY20E

NII 3.2 3.0 3.1 3.2

NII INCI. Securitization 3.2 3.0 3.1 3.2

Total income 3.9 4.9 3.9 3.9

Operating Expenses 0.3 0.3 0.3 0.3

PPOP 3.7 4.6 3.5 3.6

Total Provisions 0.2 0.6 0.1 0.1

RoAA 2.4 3.3 2.4 2.4

Avg. Assets/Avg. net worth 8.4 7.3 6.4 6.5

RoAE 20.2 24.0 15.3 15.5

Source: Company Data, PL Research

HDFC

July 30, 2018 8

Price Chart Recommendation History

No. Date Rating TP (Rs.) Share Price (Rs.) 1 9-Oct-17 Accumulate 1,843 1,740

2 30-Oct-17 BUY 2,000 1,706

3 10-Jan-18 BUY 2,000 1,736

4 30-Jan-18 BUY 2,160 1,953

5 13-Apr-18 BUY 2,222 1,837

6 30-Apr-18 BUY 2,228 1,885

7 10-Jul-18 BUY 2,228 1,920

PL’s Recommendation Nomenclature (Absolute Performance)

Buy : > 15%

Accumulate : 5% to 15%

Hold : +5% to -5%

Reduce : -5% to -15%

Sell : < -15%

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

1022

1273

1524

1774

2025

Au

g-1

5

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

(Rs)

HDFC

July 30, 2018 9

ANALYST CERTIFICATION (Indian Clients)

We/I, Ms. Pritesh Bumb- MBA, M.com, Mr. R Sreesankar- B.Sc , Ms. Vidhi Shah- CA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

(US Clients)

The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report.

DISCLAIMER Indian Clients Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as “PL”) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com.

This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security.

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