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Investors of mortgage lender Housing Development Finance Corp. Ltd (HDFC) are an elated lot. The stock was among the top gainers on Tuesday with the share price rising nearly 2%.

In an update on how the December quarter fares, HDFC said its disbursements grew 26% year-on-year. Disbursements in the first nine months of FY21 were 86% of the levels seen in the same period last year.

“We expect this to translate into low-to-mid teen AUM growth in individual loans for the quarter," analysts at Motilal Oswal Financial Services Ltd wrote in a note. AUM is assets under management.

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For investors, HDFC’s latest update is a confirmation of the lender’s resilience during the pandemic. To be sure, one of the signs of a potential growth recovery for HDFC was already visible. Home sales in metro cities have surged in the December quarter. Registrations have surpassed pre-pandemic levels and even smaller cities have begun showing promise.

While the debate on whether this trend would sustain is on, this improves the short-term prospects for lenders such as HDFC. Analysts at Jefferies India Pvt. Ltd point out that unsold inventory levels are down 20% from their peaks and expect the housing sector to recover. All of this bodes well for HDFC.

The lender’s position as the largest housing finance company has given it enough benefits on the cost of funds front. Borrowing from the bond market or even banks has been easy for HDFC given its rating and healthy balance sheet.

Ergo, the lender won’t find it difficult to maintain spreads despite the downtrend in interest rates. Investors are also less worried about asset quality given the lender has a large provisioning buffer anticipating stress ahead. As of September, HDFC had 1,200 crore as provisions specifically towards pandemic-related stress.

But, here is a thread of caution. The outsized recovery in the December quarter is on the back of a general optimism due to the festival season. HDFC has also benefited from the boost to home sales from measures such as stamp duty reduction in some states.

It remains to be seen whether the robust recovery sustains, going ahead. That said, analysts believe that even if the speed of recovery falters, HDFC would be able to report superior growth rate through market share gains.

Shares of the mortgage lender have risen 26% in the past two months, outpacing the broad market. Much of the positive expectations seem to have been captured in the valuations.

Expecting robust performance from the largest player in the sector is logical. For HDFC, the real test is sustaining the growth rate for it to keep up the cheer.

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