Global brokerage house CLSA upgraded mortgage lender Housing Development Finance Corporation (HDFC) to 'buy' from 'outperform' with a target price of ₹3,050, indicating a 30 percent upside in the stock.
Improving affordability and a turn in the real estate cycle are key positives for the lender, CLSA stated in its report. It added that HDFC has underperformed peers by 20-30 percent over the past 12-18 months leading to an improvement in its risk reward.
An improving risk to reward is the key reason behind the upgrade, noted CLSA.
The stock has fallen around 13 percent in the last 1 month and 17 percent in the last 1 year. In comparison, its peers Bajaj Finserv, Bajaj Finance, Chola Finance, Piramal Enterprises have jumped over 20 percent each in the last 1 year.
"HDFC's current valuation appears to be at a low point, with the valuation multiple having bottomed around similar earnings multiples of the past 10 years," the brokerage explained.
Going ahead, CLSA estimates a 13 percent growth in the company's net interest income (NII) over FY21-FY24 and a 15 percent rise in its assets under management (AUM) over the same period. It further stated that mortgage growth is likely to remain strong for HDFC. The core pre-provision operating profit growth over FY21-24 is likely to be much better than during the down cycle in FY14-20, noted CLSA.
In the December quarter, the lender posted an 11 percent rise in standalone net profit at ₹3,261 crore versus ₹2,926 crore in the year-ago period. Net interest income rose 5 percent to ₹4,284 crore as against ₹4,068 crore in Q3FY21.
"The demand for home loans and pipeline of loan applications continues to remain strong. Growth in home loans was seen in both, the affordable housing segment as well as in high-end properties. The increasing sales momentum and new project launches augur well for the housing sector," HDFC said in a stock exchange filing. As of December 31, 2021, the assets under management (AUM) for the lender stood at ₹6.18 trillion against ₹5.52 trillion a year ago.
The company's growth outlook is improving though the turning rate cycle is negative for its net interest margin, it added.
"Its valuation, while a turning rate cycle, will constraint net interest margin, over the last decade, its multiples, even in volatile periods like the taper tantrum (2013) and NBFC crisis (2018), have bottomed at similar multiples," CLSA said.
The stock rose as much as 2 percent to its intra-day high of ₹2,389 per share as against a 0.1 percent or 38 points decline in BSE Sensex at 58,103.
