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HDFC: A growth stock

Sep 26, 2001

HDFC’s stock has strongly beaten the market trend in the current year. On a YoY basis, while the Sensex crashed by 36%, the stock price of the company flared up by 52%. Since the beginning of 2001 (January 2001) also, the stock gained 26%, while the Sensex has shrunk by 34%. Over the past ten years, HDFC’s revenues have grown at a compounded annual growth rate (CAGR) of 23%. Profits on the other hand have outperformed the topline growth and increased at a CAGR of 30%. Meanwhile, the average market cap of the company rose at a CAGR of 36% during the same period. The company has been successful in generating investors’ wealth in terms of capital appreciation and higher dividend payouts.

From a mere housing company, HDFC is now a one stop shop for financial products, offering a range of services including asset management, insurance, broking and commercial banking. Its core business area housing finance also has a lot of potential to grow. According to National Housing Bank (NHB), housing loan disbursements registered a CAGR of 30% per annum over the past four years. The sector is expected to grow by over 20% per annum in the current year.

Also, considering the current dismal state of the equity markets, sliding interest rates and low returns on investment in gold, inclination towards investing in property is high. Added to this the tax incentives on both interest as well as repayment of instalment bring down the effective cost of the loan. Further, real estate prices have not moved much in the past four years. This is likely to have a positive impact on the property and the home finance market.

Housing industry is the ever-growing market in world. Even the US economy, which is facing downtrend, housing sales continue to grow at an impressive rate. Sales of existing US homes rose by 5.8% in August ’01 to a record seasonally adjusted annual rate of 5.5 m units compared to 5.2 m units in the previous month. However, the growth pace is expected to slowdown beginning September month consequent to the attacks on the country.

Back to India, the potential growth opportunity for the sector is immense with the widening housing shortage. In the recent years, housing has also become more affordable due to increasing urbanisation and higher consumer incomes. Interestingly, the Indian markets are following the overseas trend, where the people buy property at an early age.

Housing finance companies (HFC) are setting up wide networks that operate efficiently throughout the country, providing finance at all levels of incomes. HDFC also has a well-established product distribution network comprising 87 offices in India and one international office in Dubai. It also has service associates in Kuwait, Oman and Qatar. This gives the company an extensive reach, unparalleled by its peers.

What will boost growth further is the value added services provided by HDFC. The company has diversified its role and helps in identifying properties according to individual requirements. It assists in completing legal due diligence of the same. The company is also growing inorganically with a cautious approach. Its recent acquisition of Home Trust Housing Finance and Gruh Finance would not only increase its size but will also add to the economies of scale.

At the current market price of Rs 679 HDFC is trading at a Price/Book value ratio of 3x and P/E of 15x FY02 projected earnings. Its current valuations are one of the highest in the past ten years. The company’s proactive nature and brand name has always accorded it premium valuations on the bourses. Compared to other stocks in different industries, HDFC’s stock looks expensive in the current market scenario. However, in view of it’s past performance and future growth potential the stock is likely to trade at a premium. Another technical factor, which will contribute a rise in stock price, is the increase in FII limit to 74%-100% by the RBI. (As on March ’01, FII and FDI were cumulatively holding 64% of the company).

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