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HDFC: Will the story sustain?

Mar 30, 2005

While the home loan market continues to grow at a CAGR of 25%, the tax sops (on interest as well as loan repayment) provide a further trigger to the same. Notwithstanding an upward bias in interest rates, if the non-food credit growth has to sustain, it has to be on the back of strength in the housing finance industry. This is further vindicated by the fact that of the total non-food credit growth witnessed during 9mFY05, retail loans, which account for approximately 40% of the total non-food disbursement, have grown at a faster clip of around 40% as against the corporate side (25%). Of this retail segment, housing loans contribute approximately 55% and is the fastest growing retail disbursement.A study of the historical movements of growth in PDI (personal disposable income) and housing loan shows that whenever the gap between the two widens, the latter tends to correct itself and trace the income growth (without any significant changes in population growth). However, in the current scenario of easy housing finance at low interest rates coupled with the huge tax benefits provided by the government, there is seemingly a possibility that the gap between the two - PDI and housing loans - would be maintained on the back of sustained growth of housing loans. Albeit, a close watch on rise in domestic interest rates is warranted at the current juncture.

It also needs to be brought to one's notice that the housing finance companies (HDFC and the like) are no more the sole beneficiaries of the housing loan boom, but their banking counterparts have also snatched a sizeable quantum of market share. HDFC, the market leader, which had over 50% of the market share in the late 90's, is today left with a little over 37%. This is because banking behemoths like SBI and ICICI are fast cashing in on the incremental demand so as to widen their retail credit exposure with minimal slippage risks.

Meanwhile HDFC also has tried to benefit from the retail reach of its banking subsidiary (HDFC Bank) and has entered into an agreement to source 'home loan accounts' from it. However, 70% of the accounts are sold back to HDFC Bank in the form of Pass Through Certificates (PTCs). Both HDFC and HDFC Bank have benefited from the 'quality' of housing loans and enjoy the best asset quality status in the financial sector.

Our view

At the current price of Rs 701, HDFC (standalone) is trading at 4.3 times its 9mFY05 book value. What cannot be denied is the fact that the premium valuation that has been accorded to HDFC is not so much derived on a standalone basis but on the basis of valuation of its subsidiaries. While HDFC Bank and HDFC AMC are the cash cows, the insurance subsidiaries (HDFC Standard Life and HDF Chubb) will also be in the reckoning once they break even.

FY04 (Rs)HoldingBookvalueEPS
HDFC 137.61 34.54
HDFC Bank24%88.42 16.73
HDFC Standard Life75%10.01 (0.92)
HDFC AMC50%33.21 9.51
HDFC Chubb General Ins74%9.95 (2.46)
HDFC Developers100%106.21 5.59
HDFC Investments100%16.16 2.95
HDFC Holdings100%0.50 0.01
HDFC Realty100%4.00 (0.57)
GRUH Finance100%120.26 2.51

Despite the rich valuations, investors have to bear in mind that the company's investments in subsidiaries that have presence in diverse business acts as a cushion. Also, the company has been able to maintain strong asset quality over the longer term, which is a matter of comfort. Although the new age competitors (read banks) pose a threat to the company's market share, fundamentally, the business seems to be on a strong footing.

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