Stock Review: HDFC

Operational trends stay strong but growth appears to be factored in at the current valuation

Despite intense competition and rising real estate prices, HDFC has reported healthy business growth for the September quarter, while maintaining spreads. Net interest income (NII) grew at a stronger-than-expected rate of about 26 per cent year-on-year (y-o-y) and 10 per cent quarter-on-quarter (qo-q) to `1,189 crore. Net profit at `807.5 crore was ahead of estimates, up 22 per cent y-o-y and 16 per cent q-o-q.

In the home finance segment, HDFC's loan growth was impressive at about 19 per cent y-o-y and five per cent q-o-q to nearly 106,300 crore. The figure is 24 per cent y-o-y on including loans sold to HDFC Bank.

The proportion of individual loans to corporate loans in the total book surged 100 basis points (bps) q-o-q to 64.2 per cent.

HDFC managed to buck the expected margin impact of higher cost of funds as spreads remained stable qo-q and improved 14 bps y-o-y to 2.34 per cent. The key here was a 188 bps dip (43 bps down q-o-q) in cost of funds through repricing of high-cost borrowings, which overshadowed the dip in yield on loans, according to a Motilal Oswal report. However, analysts believe spreads have peaked, with pressure on yields and cost of funds expected to play spoilsport.

The stock has surged 22.5 per cent since June-end compared to a 12.5 per cent rise in the Sensex during the period. It ended 0.5 per cent lower at `720.5 on Tuesday over its previous close and has seen some upgrades in earnings per share estimates after reporting a strong performance in the recently concluded quarter. However, it appears to be richly valued at nearly 5.5x consensus FY12 book value per share estimates, analysts say.