Grounded In Realty – HDFC

One important factor to be considered while making a good long term investment is to know how a particular company has been able to navigate a difficult business environment in the past. Considering the same, and in view of the current uncertain scenario, we are recommending HDFC to our readers as a Choice Scrip. HDFC has consistently delivered superior profitability and growth across various economic cycles. This ability to steer the business through volatile times makes it a safe haven for investors.

Apart from this, there are other compelling factors which have made us look at this company closely, like a strong management bandwidth, availability of capital at lower rates, access to a strong distribution network along with a solid brand identity and among the best asset qualities in the housing finance space. Further, the company has huge investments in listed as well as unlisted companies. We feel that unlocking value in the unlisted subsidiaries at an appropriate time will only add to the benefits for investors. Considering these factors, we recommend that investors buy the scrip at the current levels. Of course, investors would certainly be apprehensive about the slowdown in the real estate market impacting the company. From the way HDFC has grown in the first quarter of the current year, we don’t foresee this company being impacted severely. Also, as a part of its business strategy, which looks good, the company has moved to garner business in the Tier II and Tier III cities, as the real estate market in these cities is not impacted as much as it is in the metro regions. In fact, in the first quarter of the current year, 50 per cent of business came from the Tier II and Tier III cities.

HDFC has been a leader in the mortgage finance industry in India, with a market share of 18 per cent. If we take a look at the management performance since 2001, the capability to steer through difficult economic situations is evident through the ability to maintain spreads at 2.20-2.50 per cent, and to grow the business at 20 per cent across economic cycles. After the 2008 downturn, the scrip bounced back sharply as compared to other companies.

Even in the current difficult macro environment, it has posted a strong bottomline growth of 22 per cent for Q1 FY12. The net profit for Q1 FY12 stood at Rs 844.53 crore, as compared to Rs 694.59 crore in Q1 FY11. Further, the business growth has remained strong. The company posted a 22 per cent growth in approvals and 20 per cent in disbursement. On the interest spread front, a combination of the peaking of rate cycle along with a lower competitive market on account of withdrawal of teaser rates is advantageous for the company. The ability to raise funds at lower rates due to its better credibility is an added benefit.