Macquarie downgrades HDFC, sets target price of Rs 550

Moneycontrol Bureau

Housing finance major HDFC Ltd has been adopting aggressive accounting practices by passing provisioning through reserves and also making the adjustments for zero-coupon bonds (ZCBs) through reserves, observed a recent report by Macquarie Research. The report said the housing major of inflating earnings and ROE over the past two years. "We believe FY11 and FY12 earnings are overstated by 38% and 24% respectively and reported ROE would have been 600 and 400 bps lower at 16% and 18% respectively if the adjustments had been made through the P&L. In other words, earnings growth has been managed," the explosive report stated.

The research house has downgraded HDFC Ltd to Underperform from Outperform with a target price of Rs 550, which is a cut of 30%. The stock closed 1.63% down on Thursday at Rs 644.60.

The report goes on to state that "a structural de-rating is likely because the quality of earnings and ROE reported is being driven more by its corporate book and aggressive accounting practices. Mortgage profitability is declining structurally and regulations have become adverse. All this would make it tougher for HDFC Ltd to sustain its super-normal multiples/valuations."

Macquaries said it is generally negative on financials in India but the call on HDFC is structural, not cyclical and is clearly anti-consensus in nature.

Jhini Sinha Phira
jhini.phira@network18online.com