Retain ‘add’ on HDFC as bond borrowing costs moderate: Kotak

Updated: December 05, 2014 10:17 AM

Bond borrowing rates for high-rated housing finance companies and NBFCs have declined by about 60 bps...

Bond borrowing rates for high-rated housing finance companies and NBFCs have declined by about 60 bps in the past two months. Incremental spreads in the housing loan segment have expanded sharply as lending rates are stable. This decline puts housing finance companies in a strong footing even as we expect home loan rates to moderate. We raise estimates, increase target price for HDFC to R1,210 (from R1,100)  and retain ‘add’ rating.

Sharp decline in marginal bond borrowing cost will boost margins for housing finance companies.

Home loan rates may decline but moderately; marginal spreads expand.

Home loan rates have been stable since July 2014. As such, home loan rates have a scope to decline by about 15 bps unless banks cut their base rates. Thus, marginal spread of housing finance companies will be higher by 35-50 bps.

We factor our revised target price for HDFC Bank and roll over to September 2016. At our target price, HDFC’s core business will trade at 3.8x PBR and HDFC Bank will trade at 3.7x PBR. We value the insurance business at 2x EV, i.e. R6,000 crore and R18,000 crore for FY16 and FY17e, respectively; the life insurance business adds 6% to our SOTP. We are raising our forecasts for NIM of HDFC by 5-15 bps, which will increase its earnings estimates by 1.5-2%.

Kotak Institutional Equities


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