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HDFC a market outperformer, target Rs 2406: Enam

Friday, August 31, 2007

The mortgage business still offers tremendous potential

  • Mortgages remain under penetrated despite having moved up to 9% of GDP against approx 2%, five years back
  • Banks have started going slow on the mortgage business, which will help HDFC
  • Affordability far better – Average Cost of house to Annual Gross Income is at approx 5x against 15-20x, 10 years back

HDFC offers the best mix of growth, quality and returns

  • CAGR in loan disbursements of 29% in the last ten years and 42% since inception
  • Gross NPAs at approx 1% for last 10 years, net NPAs nil. Net Loan loan loss since inception at 5bps
  • ROE almost doubled from 16% in FY97 to an estimated 31% in FY07

No pressure seen on growth or profitability, despite rising interest rates

  • Asset-liability management among the best in the financial sector
  • Spreads likely to be maintained at greater than 2%, incremental funding more benign now
  • LTV of 63% and EMI to MGI of just 20-25%, makes HDFC less vulnerable against rising interest rates
  • Post dilution, ROE will still be high at 25% in FY08 and 23% in FY09. FCCB likely to be converted only by 2010

Value of investments estimated at Rs 826 p/s

Life insurance business likely to grow at 55-60% for next 2 years, where HDFC has approx 82% stake (51% economic stake)

Value of Life Insurance business estimated at USD 3.3billion – Rs 311 p/s for HDFC

Net of the value of investments, HDFC quotes at 3.2x FY09E BV and 13.2x FY09E earnings

Maintaining sector Outperformer with a price target of Rs 2,406


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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.