HDFC share price rose marginally on Wednesday as Goldman Sachs upgraded Housing Development Finance Corporation stock to ‘buy’ from ‘neutral’, raising the target price to Rs 3,081 from Rs 2,907 earlier. The international brokerage firm believes that there has been a significant derating in terms of stock price for HDFC in the last few quarters, and with core mortgage business now trading at 16 times FY23 core EPS, it is trading below the long-term mean valuation. HDFC shares have declined nearly 3 per cent in the past one month, and over 6 per cent in the last one year. However, Goldman Sachs sees up to 25.5% upside in the stock, going forward.
The brokerage said in its report that HDFC has underperformed the Nifty Bank/Property index by 15%/40% over the last 12 months due to multiple concerns over fundamental business drivers due to competitive headwinds, as well as asset quality challenges during the pandemic. “The contribution of core mortgage value to market capitalization remains depressed at 45% but we believe this could change as the business prospects for core mortgages improve,” Goldman Sachs report stated.
HDFC well positioned for improving visibility on earnings growth
According to analysts, the real estate cycle is bottoming out, with continued momentum in property sales, falling inventory levels, improving new launches in the system and consequently improving confidence on asset quality. Against this backdrop, HDFC, which has navigated the pandemic well from the perspective of asset quality and strengthening the balance sheet, maintaining healthy lending spreads, and expanding market share in the retail business, looks well positioned for improving visibility on earnings growth, which are estimated to be healthy over the next three financial years.
HDFC to retain market share, loan growth to increase
HDFC is expected to to retain its market share, and its retail loans is estimated to grow at a 15% CAGR over FY21-25E, even as competition is likely to remain intense on three accounts- ability to maintain competitive pricing, penetration into affordable segments, which also helps managing yields, and revival of new launches. Additionally, while rising interest rates will hurt the margin profile of wholesale-funded companies, HDFC, through various cycles, has exhibited resilience in its cost of funds partly due to the stable nature of its funding profile and strong credit rating profile. “Further, given almost the entire loan-book is floating in nature, it is better positioned to manage profitability over the near-to-mid-term in our view,” said analysts in the report.
Stock rating: BUY
Target price: Rs 3,081 (26% rally)
Goldman Sachs believes that valuations are set to bottom out as due to improvement in the company’s risk profile, stemming from improving performance of the property market as well as improving collateral values, limiting loss-given-defaults and leading to lower credit costs. However, significant uptick in competitive intensity from banks, which could impact spreads; any potential challenges in asset quality in developer portfolio, changing regulatory landscape such as implementing NBFC layer-wise framework (although HDFC would likely be in compliance with most metrics in terms of leverage), capital adequacy, and HDFC Bank diversifying distribution of mortgage loans including in the affordable housing space, could be potential downside risks for the stock.
“We believe the risk reward has turned favorable as a result of depressed valuations,” the brokerage said. It upgraded the stock to Buy, from Neutral, and revised target price upwards to Rs 3,081, implying 26% upside.
