The country’s largest mortgage lender HDFC’s second quarter was in line on all fronts. NII/Core PPOP grew 3.6%/4% q-o-q as NIM (reported) remained flat q-o-q at 3.4%. This was primarily because of the lag in transmission of rate increases (on account of the quarterly reset), which we continue to believe is largely transitory and should normalise. Assets under management (AUM) growth improved to 16% y-o-y, with individual AUM up ~20% y-o-y. Growth in non-individual loans remained soft due to pre-payments and stressed asset resolution. Asset quality remained benign with GNPAs (basis prudential norms) reducing to 1.6% (-19bp q-o-q); credit cost remained low at 28bp. HDFC continues to gain market share in core mortgages, despite increased competitive intensity.

With HDFC’s distribution strength likely to increase, we remain confident on market share accelerating further. In addition, HDFC’s low cyclicality in NIMs and strong asset quality further lends support to our view. Based on our assumptions, core valuation at 1.7x Sep-24F book appears undemanding. We maintain our Buy rating and SOTP-based TP of Rs 2,850, which implies core mortgage business being valued at 2x Sep-24F book and subsidiary valuation of Rs 1,417a share after adjusting for a 20% holdco discount.

Growth trends remain robust

• AUM grew 3%/16% q-o-q/y-o-y to Rs 6,903 bn.

• Individual disbursements grew 36% y-o-y in 1H23, leading to individual AUM growth of 4%/20% q-q/y-y at `5608bn. Management indicated that housing disbursements formed 93% of total disbursements.
• Management indicated demand for individual home loans remains strong in both the middle and high value property segments across all geographies.
• In Q2FY23, around 23% of individual disbursements were for economically weaker section and low income group customers.
• Non-individual loan book declined 3.1% q-o-q to Rs 1,295bn. This was due to pre-payments and resolution of some stressed assets in the segment.
• However, management highlighted that it has a good pipeline for construction finance loans and LRD loans, and expects non-individual book to experience strong growth in coming quarters. In 1H23 primarily individual loans contributed to AUM growth. Accordingly, the mix increased to 81.2% from 79.1% in Mar-22.
• HDFC continues to gain market share in core mortgages despite increased competitive intensity. With HDFC’s distribution strength likely increasing ahead, we expect market share to accelerate further.
• Prepayment rate on individual loans was at 10.3%, in line with industry average levels.
• As on 2QFY23 the company assigned loans worth `950bn to HDFC Bank.
• Of its total loans, ~`1.2tn were eligible for priority sector status.
• Average ticket size was ~`3.5mn (vs `3.3mn in Sep-22).~92% of new loan applications were received digitally. Metro and Tier 1 cities had better growth resulting in higher ticket size of loans.
• Individual loans are reset every quarter from the month of disbursal.
• HDFC further increased lending rates for all loans by 50bp from October 1.
• Collection efficiency for individual loans was >99% for 1HFY23.

Merger update

• Competition Commission of India  approved the merger scheme and pursuant to NLCT (Mumbai) order, the shareholders meeting has been announced.
• For transfer of non-individual portfolio from HDFC Limited to HDFC Bank, the company has requested certain forbearance.
• Management highlighted loans that not qualifying for being transferred to the bank are not substantial.