HDFC's most of subsidiaries are among the top three players in their respective segments. HDFC AMC, HDFC Life Insurance Company and HDFC Bank are other listed entities.
Shares of Housing Development Finance Corporation (HDFC) gained nearly 2 percent intraday on July 2 after Motilal Oswal retained bullish view on the stock, citing likely increase in market share and much lower competitive intensity within housing finance companies.
The stock rallied more than 24 percent from its March lows but overall has been rangebound as economy has gradually been re-opening amid COVID risk. It was quoting at Rs 1,860.80, up 1.39 percent on the BSE at 11:33 hours IST.
"Due to the COVID-19 crisis, near-term growth is likely to be challenging. However, the medium- to long-term outlook remains strong, especially given the much lower competitive intensity within housing finance companies (HFCs). A sharp decline in incremental cost of funds over the past three months would help maintain stable spreads at 2.1-2.3 percent," said Motilal Oswal which maintained its buy rating on the stock with a target of Rs 2,150, implying 17.2 percent potential upside from current levels.
The brokerage believes HDFC is well-placed in the current environment to capture profitable market share.
The company has access to low cost of funds, strong asset-liability management (ALM) position, comfortable leverage, and adequate provisioning on the balance sheet.
While the Tier-I ratio is healthy at 16.6 percent, the housing finance major is likely to improve it further with the proposed Rs 14,000 crore capital raise and stake sale in the insurance business, the brokerage feels.
It said the fundraising would help HDFC face any contingency, fund its own growth requirement, and further capture any inorganic opportunities at the parent (portfolio buyouts) and subsidiary levels (M&A opportunities).
Over the last 5/10 years, HDFC has reported a stable retail AUM CAGR of 17/19 percent.
"Despite its size, it has grown faster than its next largest peer (LIC Housing Finance – five-year retail AUM CAGR of 9 percent). Importantly, growth over the last three to four years has been driven by volumes rather than value, which is a positive," said the brokerage which expects this trend to continue, especially given the strong momentum in the Affordable Housing Finance segment – 36 percent of loan approvals by volume are toward the Economically Weaker Sections (EWS) and Low Income Group (LIG) segments.
"While growth would take a backseat in the near term, we are confident of 12–15 percent retail AUM growth from FY22," said Motilal Oswal.
HDFC had reported profit at Rs 17,770 crore for the year ended March 2020 against Rs 9,633 crore in the previous year, with 21 percent growth in individual loans (after adding back loans sold in the preceding 12 months) and 14 percent growth in the individual loan book on an Assets Under Management (AUM) basis as at March 2020.
"The share of retail customers (by value) that availed moratorium declined around 700 basis points in the second phase versus the first phase. On the other hand, the share of corporate loans under moratorium remains high at 40 percent. However, we derive comfort from the fact that in the past four years, HDFC has quadrupled its provision buffer to Rs 11,000 crore; thus, its provisions now exceed its outstanding GNPLs," said Motilal Oswal.
Its provisions as of March 2020 stood at Rs 10,988 crore, which was Rs 6,800 crore over and above the regulatory requirement. The provisions carried as a percentage of the Exposure at Default (EAD) is equivalent to 2.44 percent.
Most of HDFC's subsidiaries are among the top three players in their respective segments. HDFC AMC, HDFC Life Insurance Company and HDFC Bank are other listed entities.
"The company continues to support them when needed; for example, it infused Rs 8,500 crore equity capital in HDFC Bank in FY19 and is likely to do so again in the future, in our view. Importantly, the value contribution of subsidiaries/associates has been increasing; they now contribute around 54 percent to our SOTP versus 37 percent five years ago and 34 percent 10 years ago," said Motilal Oswal.
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