X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
HDFC: Research meet excerpts - Views on News from Equitymaster
StockSelect
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

HDFC: Research meet excerpts
Jun 22, 2010

India's largest dedicated housing financer, HDFC, has been a role model of sorts. Especially after the likes of Freddie Mac and Fannie Mae in the US fell victim to the subprime malaise. We recently met the management of the company to understand the future course of business. Also, to get an insight on the pricing of the so-called ‘teaser loan rates'.

When we asked the company as to what can help it sustain a 20% plus average annual growth rate, their logic was simple. Buying a house has been the key objective of a typical Indian household. This is ever since companies stopped providing accommodation and tenancy became expensive. The shortage of households is pegged at 24.5 m units. Of this the metros and Tier I cities alone need 6 m units. The company we are referring to has been instrumental in bridging this gap to some extent. India's first housing finance company HDFC has along with some banks financed 3 m housing units in the past 30 years. Which means that there are yet another 3 m units to be financed in metros and Tier I cities alone. Rising income levels of Indian middle class will only accentuate this demand. And players like HDFC that have at least a fifth of the pie will only stand to gain. Very few Indian businesses have this kind of long term visbility.

When it comes to profitability, the company has equally plain vanilla philosophies in place. It wants to keep home loans affordable. But without diluting the interest of HDFC's shareholders. HDFC has a target of sustaining a minimum spread of 2.2%. This is nothing but the difference between the borrowing and lending rates. The management believes that doing this at reasonable operating cost can help it sustain ROE of 20%. An improvement of 1% on the returns every year is a target that is ambitious, not impossible. Especially since HDFC does not see any need for equity dilution over the next three years.

The proportion of retail and corporate customers is expected to remain 2:1. Corporate like Tata Motors and Bajaj Auto were the first to introduce home loans for their employees through HDFC in the past decade. Their relationship has grown and strengthened over the years.

Asset quality has never been a problem for HDFC. The company has an unparalleled track record of keeping NPAs below 0.5% across economic cycles. We do not see any reason why this should change. True, teaser rates can be a huge risk if not priced properly. These are the rates that banks have offered on a temporary basis to lure customers. But for HDFC this is not a game changer. Banks have adopted this approach to utilize their low cost deposits for a temporary period. What they forget is that home loan as an asset is a long term one. Hence the customer may not be able to service the expensive loan in the longer term. But for HDFC, the loan term asset is matched with long term borrowings. That too 85% of the loans are on floating rate basis. Hence the likelihood of slippages is limited.

What impressed us most is the fact the company has brought its cost to income ratio from 30% to 8% in the past 2 decades. This has been achieved with the help of technology and utilizing subsidiary HDFC Bank's franchise. Very few competitors can duplicate this effort.

Having said that the company believes that commoditization of mortgage loans can be a potential risk. Also too many regulators in the financial system can only add to the chaos. Nonetheless, despite being largely held by foreigners, HDFC remains an Indian entity to the core. It also plans to list its insurance ventures in the days ahead.

We have recently updated our research report on HDFC. While we remain positive on the business, the current valuations warrant some caution.

To Read the Full Story, Subscribe or Sign In


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

HDFC SHARE PRICE


Feb 23, 2018 (Close)

TRACK HDFC

HDFC - SREI INFRA FINANCE COMPARISON

COMPARE HDFC WITH

MARKET STATS