Head winds have only increased for HDFC in recent months. Even as demand for housing loans was slowing down and there was a downward trend in disbursals
State Bank of India (SBI) announced a special rate (8% for the first year) to stimulate the demand for housing. Recently, it extended the period for the special rate offer to September 2009, thereby further weakening HDFC’s ability to gain market share.
While the near-term outlook is definitely a concern, we remain bullish about the long-term potential of HDFC.
Despite the housing boom in recent years, the penetration of home mortgages in India remains well below that in the developed nations.
The lower mortgage penetration coupled with the fact that the demographic situation is expected to remain favourable for the next few decades’ points towards the vast unexploited potential for the mortgage industry.
Also, the rising income levels have improved the housing affordability significantly.
Besides the long-term drivers, we draw significant comfort from HDFC’s ability to maintain a healthy asset quality and healthy margins despite challenging circumstances.
HDFC is well ahead of the other housing finance companies in terms of asset quality on the back of its robust credit assessment and focus on quality origination.
After the recent rally in the benchmark indices, especially the financial stocks, the HDFC stock is trading at 3.9x FY2009E and 3.4x FY2010E book value per share.
In context of the fundamental weakness in the near term, the current valuations of HDFC have turned rich.
Consequently, we are revising our recommendation to HOLD from Buy with a revised price target of Rs1,818.