HDFC is engaged in providing housing loans to individuals, corporates and developers. Besides its core business, the company has interest in banking, asset management and insurance through its key subsidiaries.
The recent monetary tightening, in the form of a hike in CRR/SLR and other reserve requirements, has leveled the playing field between banks and NBFCs as far as the housing loan space is concerned.
Moreover, a close rival (ICICI Bank) has priced itself out from the housing space, which augurs well for the HDFC’s core housing finance business.
Operationally, the company remains in strong position with a cost-income ratio (excluding treasury) of 9.1% compared with that of 45-50% for major banks. In addition, the asset quality of the company remains robust with GNPA of 0.84% (90+ days outstanding as % of portfolio).
Key subsidiaries continue to perform well. HDFC is contemplating listing its life insurance subsidiary (HDFC Standard Life) in the current fiscal, which would help unlock substantial value. Also, implementation of the proposed hike in FDI for insurance sector augurs well for the company.
We value HDFC based on sum-of-the-parts model at Rs2,912 (including Rs871 for the subsidiaries). At the current market price of Rs2,090, the stock trades at 2.54x FY09E book value/share excluding the value of the subsidiaries.