Company Introduction: HDFC is engaged in providing loans for the purchase or construction of residential houses, commercial real estate and loans for certain other purposes in India. Its product range includes loans for purchase and construction of a residential unit, purchase of land, home improvement loans, home extension loans, non-residential premises loans for professionals and loan against property, while its flexible repayment options include Step Up Repayment Facility (SURF) and Flexible Loan Installment Plan (FLIP).
Investment Arguments: HDFC is the largest mortgage player in India. HDFC holds 24% in HDFC bank. The company also has two insurance subsidiaries where it holds 74% stake i.e. HDFC life and HDFC Ergo general insurance company. Increase in FDI limit in Insurance sector will help Indian promoters to unlock the value of their investment and improve capital adequacy.
Expected Value: 947 Sector: NBFC
Over the last decade HDFC has delivered a PAT CAGR of 22%. Impeccable asset quality, growth and profitability performance has led to market cap CAGR of 30%. HDFC has good distribution franchise owing to bank’s strong branch network. We believe this will help HDFC to maintain growth momentum going forward. As interest rates seem to have peaked out and expected to decline from FY 14. We believe this will boost profitability as well as ROE.
Valuation
At the current price of Rs. 793, the stock trades at a PBV of 3.4x for FY15e and 3.9x for FY14e. Our target price of Rs. 947 is based on target P/BV of 4.10 for FY 15 BV.( last 3 years Average.)
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