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JMFL
HDFC (Buy)
CMP: ₹1,267.5
Target: ₹2,700
With the subsidiaries coming of age, we believe the solid core housing finance story of HDFC has got lost in translation. Currently, the core sector is trading at its historical low valuation of 1.35x one-year forward price-to-book value.
HDFC is a compelling ‘buy’ opportunity given a) superior liability franchise with the largest deposit base within the NBFC space; b) best placed to benefit from lower rates and normalisation of credit spreads going ahead (130 bps credit spreads on three-year paper vs 90 bps two years ago); c) poised to maintain retail home loan market share while selectively increase market share in corporate segment especially developer finance as 35 per cent of the overall market (including banks) is either defocusing/recalibrating their strategy/reeling under capital constraints; d) ability to maintain spreads over the years despite increase in share of low yielding individual loans by 400bps over the last two years to all time high of 76 per cent; and e) best in class asset quality in a challenging environment with possible monetisation of investments providing adequate cushion against asset quality shocks (for example Bandhan Bank stake is valued at ₹8,400 crore which is 2.2x NS3 assets as of Sep’19). We expect AUM CAGR of 13 per cent over FY19-21E with earnings CAGR of 17 per cent.
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