HDFC Share price: Jefferies maintain Buy rating on HDFC with a target price of Rs 3340

Presenting at our India Housing and Real Estate Summit, Keki Mistry (VC & CEO of HDFC ) indicated demand recovery in housing is better than expected and looks structural as it comes after years of pent-up demand. Hence, a moderate rise in prices/ rates should not impact demand much. On asset quality, while NPLs can have some blips, provisioning level is adequate. Any decision on M&A will be based on RBI's final guideline for NBFCs. HDFC Share price today is Rs 2705, trading flat in today's session. 

Demand uptick better than expected and looks structural:

Mistry highlighted that retail demand for housing has come out to be better than expected and should last longer as it comes after years of moderate demand. While improved affordability (lower prices, rates, duties coupled with stable income) has supported this rebound, some increase in prices should not materially affect demand.

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Demand has been stronger in slightly higher ticket size segments and among completed projects. On the funding side, while rates seem to be rising he expects RBI to maintain ample liquidity and supportive rates; moreover HDFC has the option to toggle between bonds (market can be volatile) and bank loans/deposits (where rates tend to be steadier) to manage costs.

Resolution on asset quality through sales and stress-asset fund:

Improved demand for housing has helped developers reduce their inventory levels and deleverage their balance sheets. Further, funding from the sovereign-backed SWAMIH fund has also helped restart stuck housing projects. HDFC has restructured sub 1% of AUM - 0.3% of retail loans and 2.8% of corporate loans. Mistry highlighted that while it can be difficult to be fully certain about asset quality, HDFC has built reasonable provision buffers to manage it (1.2% of loans).

Small vs large HFCs:

Jefferies highlighted that the opportunity for housing finance in India is immense as mortgage penetration is low (10% of GDP) and two-thirds of the population is < 35 years of age. The opportunity for housing financiers is large and across the risk spectrum. Smaller HFCs have the opportunity to cater to the higher end of the risk spectrum, where they do not have to compete with large banks/HFCs. However, they should have the ability to underwrite the risk well to generate risk adjusted RoEs.

HDFC is Jefferies preferred pick to play the housing demand recovery in India. Jefferies maintain Buy rating with a target price of Rs 3340, including the value of mortgage lending business at 3x Dec-22 P/ABV.