We expect many M&A opportunities in our subsidiary businesses- HDFC

Update on the Indian Equity Market:

On Tuesday, NIFTY closed in the green at 10,471 (+1.5%). Top gainers in NIFTY50 were Bajaj Finance (+9.3%), Larsen & Toubro (+6.7%) and IndusInd Bank (+6.5%). The top losers were Reliance (-1.4%), Bharti Airtel (-0.6%) and VEDL (-0.1%). Top sectoral gainers were PSU BANKS (+3.4%), REALTY (+2.9%) and PVT BANKS (+2.7%) and there were no sectoral losers.

Excerpts of an interview with Mr. Keki Mistry, CEO, HDFC with Economic times dated 22^nd June 2020:

• Over the next one-and-a-half to two years, a number of opportunities will come up to make investments. They will look at good M&A transactions not just in the mortgage business but also in their subsidiaries – be it life insurance, general insurance, or AMC.
• If such an opportunity does come up, then they do not want to start looking at whether they have adequate capital or not. That’s why at this point they want to take an in-principle approval from shareholders, which would take about five to six weeks roughly.
• After they get the approval, they will be ready with some plan; whether they would do equity or do some other instrument which will convert into equity at a future date.
• Today the plan is that out of that Rs 14,000 crore, some part will be pure equity and some part will be an instrument convertible into equity at a future date – could be two years later, three years late.
• One must also remember that every rupee they invest into their subsidiaries reduces resources from a tier one point, and therefore, the need for capital at that point of time. It impacts their capital ratios.
• When they invest, say, Rs 5,000 crore into a subsidiary, that sum gets deducted straight away from their net worth and capital for the purpose of calculating capital issued. So that is the only reason why they are looking at capital raising.
• Whenever they believe the opportunity is right and it is a good time to go to the market that is the time they will reach out to the market. Their capital adequacy as of March 31, 2020, for tier one capital was 16.6% and total capital was 17.7%.
• Housing loan is a lot more secure, than a car loan or a consumer loan or a personal loan. The reason being that is the advance has already been paid for a property, which always has a value.
• This is obviously a much greater crisis than we had in the past, but what we had in 2008-2009 was also an economic crisis and to some extent in 2002, 1992, 1998 and at various other points of time.
• In the short term, one might see non-performing loans inch up, but once normalcy comes back, non-performing loans will come back to normal levels. Something similar will happen this year also.
• Recovery is on track, which has been a lot faster than what he would have expected it to be. The entire month of April was lockdown, offices were shut and there was very little business that they could do. They could do some disbursements, but that was for loans taken earlier.
• What they have seen from the second half of May is that with every passing day, loan disbursement is getting better and better compared with what it was in the previous year. That trend has fortunately remained.
• Business is picking up, disbursements are picking up. As there was little business for one-and-a-half months, they are still not close in their average.

Consensus Estimate: (Source: market screener and investing.com websites)

• The closing price of HDFC Ltd was ₹ 1,843/- as of 23-June-2020. It traded at 3.5x/ 3.2x the consensus book value of ₹ 529 /571 for FY21E/22E respectively.
• The consensus price target of HDFC Ltd is ₹ 1,982/- which trades at 3.5x the FY22E book value of ₹ 571/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”