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HDFC (Housing Development Finance Corporation)
Top pick – safe haven. We maintain our OW rating on the stock. Its premium
valuations are supported by high returns combined with consistency and low risk. Its
arrangement with HDFC Bank in mortgages has deepened its distribution, expanded
funding source. We adjust earnings marginally by 1% but lower our multiple
marginally to 3.2x from 3.6x earlier and thus our PT of Rs800/share is unchanged in
spite of rollover to Mar-12 from Sep-11 earlier.
Margins resilient. We expect HDFC’s margins to stay resilient, despite a sharp
increase in cost of funds. a) Their ability to diversify fund costs is a cushion – the
recent spike in 1-year rates implies that its retail deposits are now cheaper than
wholesale funds by ~75bp and b) lending rates to existing clients are up by ~100-
125bp in the last three months.
Loan growth not at risk. We forecast loan growth at 21% in FY12, driven by 24%
growth in disbursements. We do not see the slowdown in GDP growth affecting this,
given HDFC’s deep distribution that’s expanding via HDFC Bank’s branches.
Headline growth may be impacted by higher buybacks by HDFC Bank , driven by
the higher limits for priority sector eligibility. That, however, is an accounting detail.
Insurance – gaining market share. HDFC Life has shown strong market share
gains in the recent past, riding on a better product profile and the expanding reach of
HDFC Bank. Margins have structurally adjusted downwards courtesy the new ULIP
guidelines, but we expect HDFC Life to show stronger margins than the competition.
There is also an increased likelihood of the Insurance Act getting changed, paving
the way for an IPO and value unlocking.
Key risk – slowdown in housing supply. Real estate developers are under pressure ,
primarily from lack of bank funding. If this becomes systemic, it may lead to a
slowdown in project execution – which would affect HDFC’s volumes. HDFC’s
hedge, in our view, is that it operates in the low ticket-size, smaller town segment,
where volumes are driven by smaller developers, who are less affected by the current
adverse environment.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC (Housing Development Finance Corporation)
Top pick – safe haven. We maintain our OW rating on the stock. Its premium
valuations are supported by high returns combined with consistency and low risk. Its
arrangement with HDFC Bank in mortgages has deepened its distribution, expanded
funding source. We adjust earnings marginally by 1% but lower our multiple
marginally to 3.2x from 3.6x earlier and thus our PT of Rs800/share is unchanged in
spite of rollover to Mar-12 from Sep-11 earlier.
Margins resilient. We expect HDFC’s margins to stay resilient, despite a sharp
increase in cost of funds. a) Their ability to diversify fund costs is a cushion – the
recent spike in 1-year rates implies that its retail deposits are now cheaper than
wholesale funds by ~75bp and b) lending rates to existing clients are up by ~100-
125bp in the last three months.
Loan growth not at risk. We forecast loan growth at 21% in FY12, driven by 24%
growth in disbursements. We do not see the slowdown in GDP growth affecting this,
given HDFC’s deep distribution that’s expanding via HDFC Bank’s branches.
Headline growth may be impacted by higher buybacks by HDFC Bank , driven by
the higher limits for priority sector eligibility. That, however, is an accounting detail.
Insurance – gaining market share. HDFC Life has shown strong market share
gains in the recent past, riding on a better product profile and the expanding reach of
HDFC Bank. Margins have structurally adjusted downwards courtesy the new ULIP
guidelines, but we expect HDFC Life to show stronger margins than the competition.
There is also an increased likelihood of the Insurance Act getting changed, paving
the way for an IPO and value unlocking.
Key risk – slowdown in housing supply. Real estate developers are under pressure ,
primarily from lack of bank funding. If this becomes systemic, it may lead to a
slowdown in project execution – which would affect HDFC’s volumes. HDFC’s
hedge, in our view, is that it operates in the low ticket-size, smaller town segment,
where volumes are driven by smaller developers, who are less affected by the current
adverse environment.
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