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Last Updated : Nov 28, 2019 11:55 AM IST | Source: Moneycontrol.com

After a 11% return in 1 month, Morgan Stanley says this multibagger still has some steam left

While having a bullish stance, the brokerage raised its price target on the stock to Rs 2,900 from Rs 2,600 earlier, implying 24 percent potential upside from current levels.

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India's largest housing finance company, Housing Development Finance Corporation (HDFC), is a key beneficiary of the structural consolidation underway in the housing and real estate finance segments, says Morgan Stanley which has an overweight rating on the stock, citing attractive valuations.

The global brokerage house believes the return on equity (ROE) and the earnings per share (EPS) growth at HDFC is poised to stage a multi-year recovery, supported by structurally stronger positioning among non-bank lenders.

The stock rallied 11 percent in the last one month and 23 percent in one year while in, the last 10 years, it gave a 332 percent return.


While having a bullish stance, the brokerage raised its price target on the stock to Rs 2,900 from Rs 2,600 earlier, implying 24 percent potential upside from current levels.

"Events over the past year or so have polarized funding availability and funding costs within the NBFC/HFC group. Entities with strong parentage and business vintage – like HDFC – have benefited from the market's trust. We believe these changes are likely structural, which implies that funding availability for the likes of HDFC has structurally increased," said Morgan Stanley.

While many NBFCs/HFCs grew aggressively in home loans and wholesale real estate loans over the past five years, HDFC stayed conservative.

The brokerage said fixed income markets had been cutting exposure to these lenders due to concerns about the quality of their wholesale real estate books. It thinks many of these players will exit wholesale lending and will also struggle for growth in home loans given lack of funding and thin profitability of that product.

Thus, HDFC's growth runway can improve structurally, it said, adding that ROE should also benefit, given better risk-adjusted pricing and lower cost of funds.

The brokerage believes HDFC will step up growth in wholesale real estate loans (higher-yielding), given its significantly-improved industry positioning owing to the lack of credit supply to this segment.

"Pricing power and underwriting terms should be in its favour. Further, HDFC's funding costs continue to fall because it is the preferred vehicle for fixed income investors; we see more scope for this. This should only enhance HDFC's ability to pick and choose loans," it said.

Morgan Stanley expects the loan growth at HDFC to pick up over the next 12 months as competition from other NBFCs/HFCs continues to ease and terms for stronger lenders improve further.

It sees FY20-25 EPS CAGR of 22 percent for its core lending business and expects core ROE to improve from around 13 percent in F20 to around 15.5 percent in FY22 and to around 18.5 percent in FY25, driven both by higher underlying profitability and a pickup in leverage as HDFC's excess capital gets deployed.

In the bull case, the global brokerage house expects the stock to go up to Rs 4,155 per share, giving a return of 78 percent over current levels if there is a strong progress on resolutions in stressed real estate assets and pick-up in demand for housing.

"Fast track real estate resolutions and pick up in housing demand can create senior high yield financing and plain vanilla financing opportunities for stronger lenders like HDFC. We value stakes in subsidiaries and associates at Rs 2,355 per share and apply no holding company discount," it explained.

Last week, JM Financial also said HDFC was a compelling buy opportunity given a) superior liability franchise with the largest deposit base within the NBFC space, b) best placed to benefit from lower rates and normalization of credit spreads going ahead (c.130bps credit spreads on the three-year paper versus 90bps two years ago), c) poised to maintain retail home loan market share while selectively increase market share in corporate segment especially developer finance as 35 percent of the overall market (including banks) is either defocusing/recalibrating their strategy/reeling under capital constraints, d) ability to maintain spreads over the years despite increase in the share of low yielding individual loans by 400bps over the last two years to a record high of 76 percent and e) best in class asset quality in a challenging environment with possible monetisation of investments providing adequate cushion against asset quality shocks (for eg. Bandhan Bank stake is valued at Rs 8,400 crore which is 2.2x NS3 assets as of Sep’19).

With the subsidiaries coming of age, the brokerage believes the solid core HFC story of HDFC has got lost in translation. Currently, the core HFC is trading at its historical low valuation of 1.35x one-year fwd PBV.

"We expect asset under management CAGR of 13 percent over FY19-21E with earnings CAGR of 17 percent. HDFC is our top pick in the HFC space and a compelling buy with a target of Rs 2,700," it said.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Nov 28, 2019 11:02 am