HDFC Ltd is trading at the lower end of its trading band. Over the past 10 years, HDFC traded above the current multiples except in Q3FY09 when concerns on developer loan book pulled down the stock. HDFCs core business is currently trading at 2.3X core PBR FY15 estimates.
We are reducing our estimates by 3-6% over FY2014-16E to factor lower NII growth. We are revising our price target to Rs 800 (from 790) to factor lower estimates and the rollover. We value the stock at the average of our SOTP-based fair value estimate for FY14 (R740) and FY15 (R850). We value the core business at 3.6X core PBR for core RoEs of 26-30%.
We upgrade our rating to add from reduce (16% upside from current levels). We believe that housing finance is a superior asset class presently due to (1) lower overhang of asset quality performance (as compared to infrastructure NBFCs), (2) faster loan growth than autos due to longer tenure of housing loans, and (3) we are also modeling 17 bps compression in reported spreads over the next two years.