IIFL: Buy HDFC target 787

HDFC has transformed itself from a pure mortgage player to a
financial services conglomerate that derives 38% of its value
from non-mortgage businesses. Superior credit rating and
access to retail deposits have helped the company borrow at
competitive costs and maintain stable 2%+ spreads. Further,
low operating costs and adequate check on credit quality
have resulted in healthy growth and in turn best-in-class
returns ratio. With immense potential in mortgage business,
we believe HDFC would be the key beneficiary. The stock has
underperformed its peers YTD and currently trades at
attractive valuations. BUY.
Low mortgage-GDP ratio provides room for ample growth
Mortgage-GDP ratio in India remains low at 7% clearly depicting the
huge under-penetration. While real estate prices are near their peak,
we believe, that a) rising levels of income and higher affordability, b)
easy availability of finance, c) urbanization and evolution of nuclear
family concept, d) soft interest rate regime and e) tax incentives
under the Income Tax Act would drive growth further. HDFC, with a
dominant 16%+* market share in this space, will be the key
beneficiary of the growth.
Spreads remain intact despite volatile interest rate regime
HDFC has a diversified loan portfolio comprising individuals (~65%
of total loans) and corporates. Superior credit rating, access to retail
deposits and adequate check on ALM portfolio have enabled the
company maintain its spreads at 2%+ for past several quarters
despite gyration in interest rate. While the central bank has raised its
key policy rates by over 100bps in the past five months, we believe
that the company will be able to maintain its spreads at current
levels.
Value unlocking in subsidiary to drive valuations further
HDFC has reportedly been planning an IPO for its life insurance
business. While uncertainties over listing guidelines prevail, we
believe that the process would complete by end-FY12. We expect
valuations to re-rate significantly from current levels given a)
immense potential in mortgage business, b) stable spreads, c) bestin-
class returns ratio, d) minimal concerns on asset quality e) value
unlocking in subsidiary and f) foray into educational loan space.