HDFC’s premium valuation gets credence from Q4 show, outlook
PremiumLower interest rates and a drop in real estate prices enabled home purchases
In all respects, the fourth quarter of FY21 was a blockbuster one for the housing market and by extension for home loan lenders.
The stamp duty cut in selected states was nearing deadline, prompting Indians to close purchase deals fast in order to take advantage of lower taxes. Besides these, lower interest rates and a drop in house prices too were compelling reasons to clinch that home purchase.
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5 min read . 06:30 PM ISTHousing Development and Finance Corporation Ltd’s (HDFC’s) stellar growth in net profit and a 60% surge in loan disbursements is an outcome of these salutary circumstances.
What’s more, some of these conditions may persist even in the June quarter. Both interest rates and house prices are unlikely to rise. Along with an optimistic outlook from the lender, investors have got enough reason to love the HDFC stock.
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Keki Mistry, vice chairman and chief executive officer, said that demand for loans has been robust across segments but more so for upscale properties in metropolitan cities.
This reflects in the roughly 8% increase in the average loan size of the lender for the quarter.
Mistry, however, believes that it is too early to assume robust growth for the current quarter.
“It is still early as the second wave is still evolving. So, I cannot give a short-term outlook but surely in the medium to long term, demand for housing loans will remain strong," he said.
What works for the lender this time around is that restrictions on mobility are far less than the nationwide lockdown in early 2020. Ergo, the outlook on employment and wages is not bleak. That gives borrowers the confidence to go ahead with their property purchases.
Even so, Mistry is unwilling to assume that the current trend of disbursements will continue. As far as operations go, Mistry said the learnings of last year have ensured that the company is prepared for strict lockdowns this time too. In essence, collection efficiencies are unlikely to see adverse effects.
Another factor that sets apart HDFC from its peers is the provisioning level. The lender set aside ₹1,274 crore as provisions during the March quarter, a 21% increase from the previous quarter. Its provisions are more than its pile of bad loans, and give coverage far in excess of 100%. This compares with a coverage ratio of 60-70% among its peers and above 70% for most banks.
But investors need to watch the stress in the lender’s non-individual book.
Bad loans inched up to 4.77% of loans in this segment. Further, 73% of the lender’s restructured pile came from non-individual book. HDFC has turned cautious on construction finance, shrinking its book in FY21. This has brought down the share of non-individual loans in the overall book to 23% in FY21.
Of course, the impact of the pandemic was visible in both growth and asset quality. The lender’s asset under management growth was 10%, far lower than its historic trend of roughly 15%. Gross bad loans that were below 1% in past years have risen to near 2% for FY21.
HDFC may not be at its best of health when compared with its past but it is better when pitted against peers. This relative strength has kept the premium valuation intact for the lender.
Despite underperforming the broad market so far in 2021, shares of HDFC trade at four times estimated book value for FY22.
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