BackHDFC valuations call for growth pick-up
Sustainability of HDFC stock's rally depends a lot on how demand for home loans picks up when economy recovers
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Housing Development Finance Corp. Ltd (HDFC) continues to operate in a steady state. Operating profit from its core business (before adding dividend from subsidiaries and profits from sale of investments) grew 17% in the December quarter from a year ago. That compares with a loan growth of 19%, including loans sold, which means the firm is managing its business operations well.
This growth was driven by loans to individuals, which grew at 23%. Growth in the corporate loan book was 10%, down marginally from the September quarter. While there have been lot of inquiries, it hasn’t translated into anything significant, said Keki Mistry, the firm’s vice-chairman and CEO.
Loan spreads grew marginally to 2.31% in the December quarter and gross non-performing loans as a proportion of the loan book stood at 0.69% at the end of December, unchanged from three months earlier.
HDFC’s shares have comfortably outperformed the benchmark Sensex this fiscal year. Its core business (excluding subsidiaries) is trading at 5.5 times adjusted book value for 2016, according to estimates from Angel Broking Pvt. Ltd. That is not only owing to the firm’s performance but also speculation about a merger with HDFC Bank Ltd.
The sustainability of the HDFC stock’s rally depends a lot on how the demand for home loans picks up when the economy recovers. The onset of a rate cut cycle and that the firm is well capitalized are factors in its favour, but as the firm’s management pointed out, it is difficult to say when exactly such a pick-up will happen.
The writer doesn’t own shares in the above-mentioned companies.
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