Buy HDFC; target Rs 950: Nirmal Bang

Nirmal Bang is bullish on Housing Development Finance Corporation (HDFC) and has recommended buy rating on the stock with a target price of Rs 950, in its April 03, 2013 research report.

"HDFC Limited has consistently met the expectations of the market in terms of consistency while keeping the asset quality intact. In the present uncertain times, we expect the mortgage finance-major to continue to not only continue to with this trend going forward also.

Investment Rationale

• Maintaining consistency; with strong asset quality: HDFC Limited has posted a CAGR of 22 per cent and 21 per cent in its loan book and PAT over the last five years. We are confident of the fact that the company would continue to maintain this pace of growth going forward also.
• Strong trend expected to continue going forward also: Higher property prices and the strong demand coming from Tier-II to Tier IV cities, more than compensates for the decline in registrations in metro cities.
• Lowest cost/income ratio: The cost advantage for HDFC would continue to exist with Cost/Income Ratio at ~8 per cent.
• Weak home loans to augur well for the leader: The relative weakness in the housing finance loan book of Banks augurs well for HDFC Limited considering the leadership status and consistency in achieving a 20 per cent growth in loan book.

Valuation & Recommendation: HDFC Limited registered a Net Interest Income of Rs.4995 crore for 9MFY’13. PAT for the period stood at Rs.3293.1 crore compared to Rs.2796.5 crore during 9MFY’12. We expect HDFC Limited to post a net profit of Rs.4887 crore in FY’13. This translates into an EPS of Rs.33.1 for the year. The respective figures for FY’14E and FY’15E are 38.2 and 45.4 respectively.

We are confident of the fact that HDFC Limited would continue to grow its loan book at 18-20 per cent per annum over the next foreseeable future with stable spreads and robust asset quality. We value the mortgage business of the company at 3x FY’15E book value. Adding the value of subsidiaries and investment in group companies, we arrive at the target price of Rs 950 over the next 9 to 12 months," says Nirmal Bang research report.

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