Motilal Oswal has given a buy rating to Housing Development Finance Corporation (HDFC) with a target price of Rs 2,150. The share price moved up by 4.59 per cent from its previous close of Rs 1754.65. The stock’s last traded price is Rs 1835.15.

The brokerage says HDFC is well-placed in the current environment, with access to low cost of funds, a strong ALM position, comfortable leverage, and adequate provisioning on the balance sheet. While the Tier-I ratio is healthy at 16.6 per cent, it is likely to improve further with the proposed Rs 140 billion capital raise and stake sale in the Insurance business. This would help HDFC face any contingency, fund its own growth requirement, and further capture any inorganic opportunities

Investment Rationale

According to the brokerage, HDFC is among the few companies that have delivered a steady performance in an otherwise cyclical sector. In addition to its disciplined growth, the brokerage likes its lean cost structure, competitive advantage on borrowings (leading to a lower-risk book), and the ability to resolve stressed corporate exposures. Given its strong asset quality and high capitalisation, net NPLs account for just 8 per cent of core net worth (excluding investments in subsidiaries).

The brokerage says HDFC subsidiaries have also outperformed peers in their respective segments In addition, the value contribution of subsidiaries/associates has increased to 54 per cent of the brokerage SOTP v/s 37 per cent five years ago and 34 per cent 10 years ago. While the current stock price reflects the near-term issues impacting the economy, it undervalues the company’s long-term potential.

As stability returns gradually with the staggered unlocking of the economy, the brokerage expects HDFC to re-rate faster than peers with comfortable liquidity and capital situation. It maintains a buy rating with a target price of Rs 2,150 (FY22E SOTP based).

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 16600.08 crore, down -42.75 per cent from last quarter sales of Rs 28996.17 crore and down -42.06 per cent from last year same quarter sales of Rs 28652.48 crore, The company reported net profit after tax of Rs 2723.87 crore in the latest quarter.

Promoter/FII Holdings

FIIs held 70.87 per cent stake in the company as of March 31, 2020, while DIIs held 17.78 per cent, and public and others 11.08 per cent.