| If smaller brethren GIC HF and Can Fin Homes can sustain earnings growth of 20 per cent y-o-y, then it is a heresy that their stocks quote at single digit PEs based on FY10 earnings, while large cap HDFC gets a fanciful PE of 30. The valuations gap need to be bridged.
HDFC-BUY
After recording a slight slowdown in home-loan disbursement growth to 18.7% YoY for 3Q FY10, we expect this to pick up over the next year, as we expect pricing pressure in the mortgage industry to ease.
Also, with a strong pick-up expected in the corporate credit segment, banks are likely to become less aggressive in the mortgage market, which we believe would help HDFC to record stronger disbursement growth over the next year.
Sale of loans to HDFC Bank may not affect earnings Management remains confident that it can sustain annual earnings growth of 20%+ over the next couple of years, and sees no reason why the company's earnings momentum would slow because of the sale of loans to HDFC Bank. Valuations seem reasonable, given strong growth PER of 16x on our FY11 core mortgage earnings forecast (after deducting Rs980/share as the value of investments from the stock price). Given the fact that the mortgage business has a high ROE of 25% (our estimate), low dilution risk, and almost negligible provisioning requirements, we continue to value HDFC on a PER basis. We see lower-than-expected loan-book growth as the key risk to our call. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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