IDEA2WIN - Buy: HDFC Limited

Buy - HDFC

CMP (NSE) 15:59, 20 May

2,201.60 65.33.06%





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Last updated on

18 Oct, 2021

HDFC is India’s premier financier in mortgage lending. As at FY21 end, HDFC’s outstanding AUM stood at ~Rs 5.7tn. HDFC offers loans to retail and corporate customers. About 77% of its loan book comprises retail loans and the rest comprises commercial real estate loans, lease rental discounting, etc. HDFC’s conservative underwriting practices reflect in its low NPAs and credit losses. Since inception, it has written off only 0.04% of cumulative loan disbursements. As of FY21, HDFC GNPA stood at 1.98%. Despite increasing competition, HDFC’s market leadership and profitability have remained intact, endorsing its strong competitive position.

Investment Rationale
Demand continues to surprise positively: Better affordability driven by stagnant prices, improving income levels and low interest rates has led to an uptick in demand for affordable as well as high-end properties. Incentives by state governments are also facilitating demand. While rates may have bottomed out, it may be 2-3 quarters before the RBI starts increasing rates. The non-individual segment too may see improvement in demand, with builders targeting to add commercial properties.

Stable asset quality outlook with positive bias: Across financials, we are seeing collections improving on MoM basis, with HDFC also witnessing the same trend. We do not expect any new stress addition; however, a shift is likely within the stress pool bucket. HDFC already has sufficient provision cover and expects credit costs to moderate from hereon. HDFC may look to continuing with the COVID buffer for a couple of quarters, before starting to utilise it. Collection efficiencies have continued to improve on MoM basis from the June level of 98.5%.

Outlook & Valuation:
The management of HDFC Limited indicated a robust growth outlook driven by strong momentum in the retail segment – in both, affordable and high-end homes. Non-individual loans too may see a meaningful pick up over the near-to-medium term given the better visibility in project completions and improved demand. Collection efficiencies continue to show improvement on MoM basis. While there may still be a shift in buckets, the overall stress pool is unlikely to increase. In our view, Credit costs are likely to moderate hereon, with excess provisioning maintained.

HDFC is our preferred pick owing to its ability to gain market share despite competitive pressures. The Real Estate market saw a swift turnaround in TTM, with x`broad-based recovery in demand. Considering its strong capitalisation, control on COF, lean cost structure and low credit cost, we expect HDFC to report healthy Core ROAA/ROAE of ~2/13% in FY24ii. We maintain BUY on the stock, with a TP of Rs3,140/share.

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