Stock Fundamentals

HDFC: Safe shelter - Buy

Radhika Merwin | Updated on February 03, 2019

Focus on affordable housing and stable asset quality are key positives

A leading market position, good track record of performance in the housing finance business, stable asset quality and diversified funding base are key strengths of Housing Development Finance Corporation (HDFC) — a safe bet in volatile markets.

Stocks of non-banking finance companies (NBFCs) have been hit in recent months due to the liquidity crisis triggered by the IL&FS default episode. While investors should be wary of investing in NBFCs and HFCs that have wide asset-liability mismatches, NBFCs such as HDFC that enjoy superior credit ratings and are well-capitalised to fund growth and better placed to tide over such a crisis remain a sound bet for investors with a long-term perspective.

The Budget 2019-20 has also doled out goodies for home buyers and the continued focus of the Centre on affordable housing augurs well for players such as HDFC.

While a structural slowdown in the home loan segment over the past two years has rubbed off on housing finance companies and banks, HDFC’s volume-driven growth and focus on the affordable housing segment have kept its performance on a sound footing. During the nine months ended December 2018, 37 per cent of home loans approved in volume terms and 18 per cent in value terms have been given to customers from the economically weaker section (EWS) and low income group (LIG).

Led by a 19 per cent Y-o-Y growth in the overall loan book (including sale of loans to HDFC Bank) and 18 per cent growth in net interest income, HDFC delivered yet another steady performance in the latest December quarter.



Investors with a two to three-year time horizon can buy the stock at current levels. The stock trades at about 3.3 times its one-year forward book value, which is far lower than its historical average of four times.

HDFC holds stakes in HDFC Bank, HDFC Standard Life, HDFC AMC, HDFC Ergo and Gruh Finance, that add to the intrinsic underlying value of its core mortgage business. The recent announcement of Bandhan Bank acquiring Gruh Finance (if regulatory approvals come by) will reduce HDFC’s stake in Gruh to a little under 15 per cent.

Outpacing the industry

Despite home loan growth slackening significantly for banks over the past two years, dominant players in the housing finance space such as HDFC have been able to maintain a healthy traction in loans. From 17-18 per cent levels (until FY16), home loan growth for banks moderated 15 per cent in FY17 and further to 13 per cent in FY18.

HDFC’s growth in the retail segment has been steady at 23-25 per cent. In the latest December quarter too, retail loans (including sale of loans to HDFC Bank) have grown by 24 per cent Y-o-Y, after a 26 per cent growth in FY18. For HDFC, growth has also been mainly volume-driven, which mitigates the risk of a sharp fall in home prices.

The average loan ticket size has gone up by just about 4-5 per cent annually over the past three years. The strong demand from the mid-income group has kept growth steady. Currently, HDFC’s average loan size is about ₹26.9 lakh.



In June 2015, the Centre had launched the CLSS under PMAY(U) for the EWS and LIG, offering an interest subvention of 6.5 per cent on housing loans up to ₹6 lakh. The subsidy, which is paid upfront on an NPV (net present value) basis, works out to a maximum of ₹2.67 lakh per beneficiary for both the categories.

Effective January 1, 2017, the scheme was extended to the middle income group (MIG) and offered an upfront interest subsidy of up to ₹2.3-2.35 lakh to borrowers, covering two income segments — ₹6,00,001-12 lakh (MIG-I) and ₹12,00,001-18 lakh (MIG-II) per annum.

Banks and HFCs, including HDFC, have been increasing their focus on the affordable housing segment to cash in on the underlying opportunity. HDFC, on an average, has been approving about 8,400 loans on a monthly basis to the EWS and LIG segment.

The run-rate on a per month basis is about ₹1,360 crore. The average home loan to the EWS and LIG segment stood at ₹10.1 lakh and ₹17.6 lakh respectively, as of December 2018.

Earnings pressure

While HDFC has managed to maintain good traction in loans despite the intensifying competition in the housing finance segment, there has been some pressure on margins in recent quarters.

From about 2.3 per cent three years back, the overall spread (return on loans less cost of borrowings) is down to 2.26 per cent in the latest December quarter. Continued pressure on spreads may need watching. Nonetheless, HDFC’s spread has remained within a narrow band over the past three years and lends comfort. Its ability to maintain a low level of delinquencies has been a key positive.

The gross non-performing assets (GNPA) in the December quarter stood at 1.22 per cent of loans, marginally up from 1.15 per cent in the same quarter last year. The uptick in GNPAs in recent quarters has mainly been due to rise in delinquency in the non-individual portfolio. This trend may need some monitoring in the coming quarters.

Under the Ind AS accounting standard, asset classification and provisioning moves from the ‘rule based’, incurred losses model to the expected credit loss (ECL) model of providing for expected future credit losses.

As per norms, HDFC is required to carry a total provision of ₹3,068 crore. As against this, the company is carrying a higher provision of ₹5,220 crore as of December 2018.

HDFC’s diversified funding base is a positive. Compared with other NBFCs and HFCs, it also fares relatively better on asset-liability management.


Published on February 03, 2019

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