Housing Development Finance Corporation (HDFC): Special Report - Analysis

HDFC in the past has made its way to the headlines with its strong financial performance. However, in the recent past the stock has been in the news for a major sell-off in the stake and for Macquarie downgrading the housing finance pioneer. The company, though posting robust growth, has not performed on the bourses on a year-to-date basis. Vidrum Mehta gets the facts to help investors take the right decision regarding this company 

Introduction

Housing Development Finance Corporation (HDFC) is a pioneer and leader in the housing finance segment in India and has assisted more than 4.02 million customers to own their dream home. It has a wide network of around 311 offices spread over 2,400 towns and cities in India. It also has operations overseas with offices located at Dubai, London, Singapore, etc. Of late, HDFC’s stock has created volatility due to a number of reasons. The question is what should investors do next? Is the housing heavyweight a good long-term bet as it has been earlier or should one just avoid the counter?

First, let us look at how the HDFC stock has performed over the past against the broader indices. If we study it on an YTD basis, HDFC has yielded capital appreciation of a meagre 4 per cent against the Sensex which has gained by around 12 per cent. So what could be the reason for the company to not perform on the bourses despite having a strong brand recall, good management credentials and a decent financial performance in the past?

Stake Sell

The answer to the above question could broadly be divided into two events which have occurred in the past six months. The first of this was the selling of stakes in February. To begin with, the U.S. private equity giant, Carlyle Group, sold a quarter of its stake in HDFC. Carlyle, which owned about 5.2 per cent of the stake, sold about 20 million shares at an average price of around Rs 677.25 per share, raising about USD 270 million. Within a short period of just 25 days, another stake sale in the company hit the streets. Citigroup offloaded its entire 9.86 per cent stake in HDFC after holding it for almost five and a half years.

With two major foreign investors exiting the stock in a short time it was obvious that shareholders required some sought of explanation from the management. In response, the management said that Carlyle was an equity player with a shorter time period while Citigroup went off on account of their capital issues. 

Macquarie Downgrade

The other big news that hit the HDFC stock was that just a month ago Macquarie downgraded HDFC saying that the company uses aggressive accounting practices to inflate its earnings. According to media reports, Macquarie was quoted as saying, “We believe FY11 and FY12 earnings are overstated by 38 per cent and 24 per cent respectively and the reported ROE would have been 600 and 400 bps lower at 16 per cent and 18 per cent respectively if the adjustments had been made through the P&L account. In other words, the earnings’ growth has been managed.”

Reacting to this allegation, the management said that it did not agree with this report, adding, “It is surprising that Macquarie in a report, as recently as May 7, 2012, had put a price target of Rs 775 on HDFC’s stock with an excellent performance rating based on the same facts and figures. We are therefore unable to understand as to what prompted the analyst to change his recommendation and outlook within a month.” We at DSIJ believe that even though HDFC justified its stand, there was serious damage caused to the brand.

Historical Performance

HDFC has consistently performed well on the bourses if we look at the long-term horizon in the past. If we compare the past six years’ returns we come to know that the company’s stock has out-performed the Sensex in a big way. From January 2006 till date, the Sensex has yielded a return of 83 per cent while HDFC has given a return of 182 per cent.

  

An appreciation in the stock price is only possible if the company shows good financial performance. HDFC has posted whopping CAGR growth of 22 per cent over the past six years in its consolidated bottomline. Let us also look at the recent June quarter financial result of the company which will help us to judge its present financial condition.

Latest June Quarter Results

On July 11, 2012, HDFC announced its June quarter numbers. The result was very much in line with the street’s expectations, which further held the share price at the same level and did not see much volatility. The company’s income from operations increased by 29 per cent to Rs 4,914 crore while the net profit of the company increased by 19 per cent to Rs 1,002 crore. The profit was marginally higher than the street expectation of around Rs 999 crore. As on June 30, 2012, the capital adequacy ratio (CAR) of the company stood at 14.6 per cent with Tier 1 CAR at 11.8 per cent, which should be considered as decent enough.

It faced some issues on the margin front as the net interest margin (NIM) of the company decreased by 10 basis points to 4 per cent on a YoY basis. On the asset quality front, the NPA improved, which is commendable. The NPA decreased by 4 basis points to 0.79 per cent on a YoY basis. The loan book grew by 19 per cent to Rs 1,48,262 crore on a YoY basis which should be considered as healthy growth rate. 

Conclusion

At the current market price, HDFC trades at a price to earnings multiple of around 26 times at the estimated FY13 earning per share. On a price to book value basis the company is available at 4.95 times which is slightly on the higher side. We still believe in the growth potential of HDFC and its management’s credentials. However, since it is trading slightly on higher valuations, our recommendation would be to buy on dips or else hold the shares for a longer horizon garner better returns.