Analysts continue to bet on HDFC despite poor Q3

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Analysts continue to bet on HDFC despite poor Q3

India’s oldest and largest mortgage lender Housing Development Finance Corporation’s (HDFC’s) December quarter numbers fell short of market expectations.

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India's oldest and largest mortgage lender Housing Development Finance Corporation's (HDFC) December quarter numbers fell short of market expectations. And the knee-jerk reaction was evident in its share price. It closed at Rs 681.55, down nearly 1% at the close of Friday's trading while the 50-share Nifty was up 1% at 4,866 points. However, brokerages are still betting on the scrip banking on its future performance.

"The reversal of interest rate cycle will act in favour of the company," said Manish Ostwal, an analyst from brokerage firm K R Choksey which has given a 'buy' call with a target price of Rs 783 in next 12 months.

"The borrowing cost would come down. The company will focus more on retail deposits rather than corporate borrowings. The share of retail loans to the total loan book has sequentially gone up from 63% to 64%. Majority of incremental credit (almost 80%) growth has come from individual loans," Ostwal explains.

Currently, corporates are paying high cost for borrowing funds due to tight liquidity situation. The interbank bank call money is hovering around 9%. In case of a policy rate cut, this rate too is expected to fall.

Moreover, deposit rates too will start falling wherein HDFC can tap retail funds offering a little better rate than other banks would offer. Retail is relatively cheaper source of funds compared with others.

"HDFC has exhibited resilience given its ability to deliver strong loan growth, stable asset quality and superior return ratios. Q3 results clearly shrugged-off concerns over any material slowdown in loan growth due to higher interest rates and elevated property prices," Kashyap Jhaveri and Aalok Shah from Emkay Global Financial Services said in a research note. The research house has set a target of Rs 700 for the scrip.

HDFC's third quarter net profit rose at the slowest pace in three years by 10.10% year-on-year to Rs 891 crore on the back of higher interest cost and lower investment income. The net interest income (NII) or the difference between interests earned and paid out rose 18% to Rs 1,367 crore.

HDFC's Q3 numbers, according to a report by Morgan Stanley, were below its expectation of Rs 1,050 crore.

"This miss was driven by weaker NII and capital gains. However, volume growth was robust; loan book (including loans sold down) grew at 21% YoY. Funding mix continued to shift away from bank loans (currently more expensive) towards retail deposits and bonds," the report said.

"We have fine tuned our assumptions on funding mix/costs and loan yields and arrived at new EPS estimates for FY12 and FY13 of Rs 26.90 vs 27.20 and Rs 33.40 vs 32.40. There is no change in our price target of Rs 700. HDFC tends to deliver consistent earnings growth," said a report by Brics Securities.

Read This :A tepid housing mkt is no dampener for HDFC's Q3 results

Saikat Das
saikat.das@network18online.com