Buy HDFC; target Rs 889: Motilal Oswal

Motilal Oswal's research report on Housing Development Finance Corp (HDFC)

Housing Development Finance Corp (HDFC) has corrected by 23 percent and underperformed the Nifty by 11 percent since the Reserve Bank of India’s (RBI) tightening of system-wide liquidity on July 15, 2013. This was on the back of rising investors’ concerns over higher cost of funds (impacting spreads) and increasing stress in the real estate segment.

In the current uncertain macro-economic conditions, HDFC is likely to be the most resilient in asset quality (cash flow-based lending, strong collateral in place etc) and growth (structural factors to aid).

Subsidiaries/associates are self-funded and thus further dilution is not needed to take care of their capital requirements; strong internal accrual (core lending RoE of 26 percent+) will take care of HDFC’s loan growth requirements.

Based on assets and liability side flexibility, spreads shall remain in the range of 2.15-2.35 percent.

Led by stable spreads, single digit cost to income ratio and superior asset quality, return ratios are expected to remain above industry average, with core RoA of ~2.5 percent and core lending RoE of ~26 percent.

"Stable spreads across interest rate cycles, impeccable asset quality track record and single digit cost to income ratio shall ensure superior core lending business RoA of 2.4-2.5 percent and RoE of 26 percent+. We expect HDFC to report core EPS of INR31/37 in FY14E/15E (FY13-15E EPS CAGR of ~18 percent on a base of 15 percent over FY08-13). The Adjusted Book Value (adj. for investments in subsidiaries) would be INR128/148 in FY14E/15E. The stock trades at a core PE of 13/9.8x FY14E/15E (24 percent lower compared with its historical average of 17-18x). Buy the stock for target price of Rs 889," says Motilal Oswal research report.

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