HDFC

05 Apr

A Merger of Equals: HDFC

Update on the Indian Equity Market:

On Tuesday, the Nifty closed lower at 17,957 (-0.5%) as indices were trading on a weak note amid profit-taking in HDFC twins following a sharp rise in the last session. CONSUMER DURABLES (+2.4%), FMCG (+1.3%), and AUTO (+1.2%) were the top sectoral gainers. FINANCIAL SERVICES (-1.6%), PRIVATE BANK (-1.5%), and BANK (-1.5%) were top losing sectors. The top losers were HDFCBANK (-3.1%), BAJAJFINSV (-2.4%) and HDFC (-2.2%), while ADANIPORTS (+3.1%), NTPC (+2.8%) and TATAMOTORS (+2.4%) were the top gainers.

 A Merger of Equals: HDFC

Edited excerpts of an interview with Deepak Parekh, Chairman, HDFC with ET on 5th April 2022:

  • The merger between HDFC and HDFC Bank is a merger of equals and comes at the right time as the latest Reserve Bank of India (RBI) regulations have narrowed the operational arbitrage for non-bank lenders.
  • Both the institutions have been evaluating the pros and cons of a possible merger for mutual benefit.
  • Over the past two years, there have been regulatory changes for Banks and Non-Banking Financial Companies (NBFCs), considerably reducing the barriers for a potential merger.
  • A host of guidelines issued by the RBI in the last three years on harmonizing regulations between banks and NBFCs include guidelines requiring large NBFCs to conversion into commercial banks, particularly those with more than Rs 500 bn of asset bases.
  • Non-Performing Assets (NPA) classification has been harmonized, NBFCs are now required to provide liquidity coverage ratio, and scale-based regulation has been introduced where the upper layer of NBFCs will have a much stricter regulatory watch.  These measures have considerably reduced the risk arbitrage that was there between a Bank and an NBFC.
  • The Liquidity Coverage Ratio (LCR) requirements are a big drain on NBFCs same as Cash Reserve Ratio (CRR) & Statutory Liquidity Ratio (SLR).
  • NBFCs need to keep their maturities in the next 30 days in a separate bank account. It needs to take all loan repayments, bond repayments, deposit repayments, and estimated disbursements in one account and transfer it to a liquid fund accruing a 2% return.
  • The strategic rationale for the proposed merger includes SLR and CRR for banks, which was 27% and has now been reduced to 22% (18% for SLR and 4% for CRR).
  • Interest rates are more favorable at present. Banks have an option to invest in priority sector lending (PSL) certificates, to meet the PSL requirements.
  • The merger makes the combined entity strong enough, countering competition and making the mortgage offering more competitive. The funding challenges both in quantum and cost will be minimized by the combined entity.
  • The bank has requested a phased-in approach in respect of SLR and CRR, priority sector lending as well as grandfathering of certain assets and liabilities and in respect of some of its subsidiaries. These requests are under consideration by RBI in terms of a letter received on April 1.
  • In a letter to RBI, HDFC has also asked for time, to be compliant on existing assets of HDFC, a specific period of 2-3 years, with new loans complying with SLR and CRR regulations.
  • The bank is aware that Developer finance, apart from earning a higher rate of interest, gets retail loans. When a builder launches a product and a construction finance is being offered, HDFC captures the first few days’ business, which emanates into large mortgage loans. However, loans given for the purchase of land will have to stop.
  • Chairman believes that the HDFC brand is not disappearing, and the brand will live through HDFC Life, HDFC MF, and HDFC Bank.
  • The time for a merger has come because of regulatory changes. NBFCs are being regulated like a bank but don’t enjoy the advantages of a bank like an overdraft, and lower cost of funds.

Asset Multiplier Comments

  • Benefits like an increase in product coverage, cross-selling opportunities to HDFC’s customers, the ability to raise funds at competitive rates, and loan book expansion will boost the performance of the Bank in long term.
  • We think the merger will be able to extract synergy benefits and will aid the competitive positioning of the combined entity as it will have the same cost structure as other banks.

Consensus Estimate (Source: market screener website)

  •  The closing price of HDFC was ₹ 2,623/- as of 05-April-2022. It traded at 3.7x/3.4x the consensus book value per share estimate of ₹ 716/ 785/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 3,200/- implies a PBV Multiple of 4x on the FY24E BVPS estimate of ₹ 785/-.

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.”

 

 

 

 

 

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06 Dec

Real Estate demand growth driven by rising income levels – HDFC

Update on the Indian Equity Market:

On Monday, markets plunged sharply in continuation to Friday’s fall. After the flat start, weak global cues and updates on the new COVID variant started weighing on the sentiment as the day progressed.

NIFTY ended 1.7% down at 16,912. IT (-2.7%), HEALTHCARE(-1. 9%), and PHARMA (-1.9%) were the top losers and there were no sectoral gainers. The top losers were INDUSINDBK (-3.7%), TATACONSUM (-3.4%), and BAJAJFINSV (-3.3%) while UPL (+0.4%) was the only stock in green.

Real Estate demand growth driven by rising income levels – HDFC

Edited excerpts of an interview with MR. Keki Mistry, Vice-Chairman and Managing Director of Housing Development Finance Corporation (HDFC Ltd) with CNBCTV18 on 3rd December 2021:

  • On new norms on recognition of Non-Performing Assets for Banks and NBFCs issued by RBI: He stated that a few years back NPA were recognized on a 180 days basis that got changed to 90 days. According to the new guidelines published by RBI, once the account is recognized as NPA, Banks won’t be able to upgrade it to standard assets till the whole loan has been repaid. Earlier, an NPA account, after payment of 1-2 installments could be categorized as a standard asset. Temporarily, there will be limited impact on Profit and Loss Account for most of the companies including HDFC but the reported Gross NPAs number will look higher for next 3-4 quarters.
  • The real estate market has steadily picked up after the slowdown in the 1HCY21 due to the COVID-19 pandemic and the resultant lockdowns.
  • Mr. Mistry thinks that the interest rates have been bottomed out but he doesn’t see that having a significant impact on the market.
  • He thinks that the runway for growth is across the country. In the period from CY17-CY20, the demand was largely focused on the tier-II tier-III towns in the outskirts of big cities. In the last one or two years, cities like Delhi, Mumbai, Bangalore, Pune, Hyderabad, and Chennai are reporting strong growth. A pickup in demand in the metro cities has been witnessed recently.
  • Mr. Mistry attributed the rise in demand to
    • Income levels rising in the past few years. He explained that the real estate prices have been stable but the income levels grew on an average by 8% per annum in the last 4 years resulting in cumulative 34-35% growth in income levels.
    • Low-interest rates
    • Feel good factor: He stated that the malls, hospitals, shops, hotels, and restaurants are full as the feel-good effect is driving and keeping people motivated.
    • The myth that there is oversupply in Mumbai and Delhi markets has disappeared, so people are not waiting for property rates to subside anymore.
  • The HDFC chief believes that affordability has increased in the market and it is an opportune time to buy real estate. To supplement this, he said that October-21 saw the highest level of loan disbursements by HDFC. This indicates strong demand and he expects it to sustain for a long time.
  • Mr. Mistry also believes that the lending rates have bottomed out but he does not expect the RBI to start raising rates in a hurry. But throughout the next 6-12 months rate hike is possible. It depends a lot on global factors like inflation, oil prices, and other factors which are not within our control.
  • The yield curve, according to him, has been steep due to excess liquidity in the system. This has been reflected in the demand seen in the high-end market which has seen a pickup after being subdued from CY17 to CY20.

Asset Multiplier Comments

  • Looking at the macro growth drivers, well-diversified loan portfolio, and adequate liquidity on hand our outlook over the long term remains positive on HDFC Ltd.
  • We think the new rule would impact in the near short term but in long term we expect the NPA levels to normalize. Stable collection efficiency and provisions higher than regulatory requirements will help support the company to maintain a healthy Balance Sheet.

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

  • The closing price of HDFC Ltd was ₹ 2,769/- as of 06-December-21. It traded at 4.2x/3.9x/3.5x the consensus BVPS estimate of ₹ 659/705/781 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 3,251/- implies a PBV multiple of 4.2x on FY24E BVPS of ₹ 781/-.

 

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.”

 

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