Housing Development Finance Corporation (HDFC) Limited is a leader in the housing finance industry in India, with a market share of more than 40%. It also has a presence in banking, life and general insurance, asset management and consumer lending through its subsidiaries. Mortgage penetration, as a % of GDP is only 10% in India compared to 45% in China and 80% in the US. This reflects the market potential for housing finance companies in the country. Furthermore, the government’s initiative of housing for all by 2022 is a major boost for affordable housing, and consequently for the housing finance players.
HDFC Ltd. has posted phenomenal revenue growth of 23.41% CAGR over last 10 years. It has been the amongst the most consistent performers in the listed space, thereby delivering great returns to investors. Its outstanding loan book stands at Rs.4.4lakh crores, which is twice the size of the second player.
The reason behind such strong numbers is a very efficient business model and prudent loan disbursement policies. In terms of loan disbursement share, 76% were individual loans while only 5% were to corporates. Out of total individual loans, 82% were to middle and higher income population. And about 81% of the loans were to salaried employees. Such distribution has helped the company keep the risk exposure very low and collections at comfortable levels.
HDFC Ltd. has overall NPA of 1.6%, which is lower than PNB Housing Finance at 1.8% and LIC Housing Finance at 2.7%. Non-Performing Loans in individual segment has been consistently at 0.75%, which is amongst the lowest in the industry. Its cost of borrowing is also amongst the lowest at 8.04%. Its capital adequacy ratio stands at 18.6% vs the statutory requirement of 15%.
Such pristine performance is the reason that more than over 80% of its shares are held by FIIs and mutual funds.
Valuation:
For the sake of normalcy and understanding the company, let us take the value of the company just before the markets started dropping on account of the COVID-19 scare. HDFC’s listed subsidiaries alone are worth around Rs.2.44 lakh crores. If we apply 20% holding company discount, the value comes out to 1.94 lakh crores. HDFC Ltd.’s market value in that period was around Rs.4.34 lakh crores. So if we subtract the value of the listed subsidiaries, the value of the housing finance business comes to Rs. 2.4 lakh cores. HDFC Ltd’s FY20 net profit is expected to be around was Rs.18000 crores, which would make its P/E less than 15.
Final Thoughts:
While corona virus could cause some disruption in the short term, HDFC Ltd. has a strong business model to navigate through the crisis. It is the leader in its industry and has been posting phenomenal growth. Its recent fall in valuations may provide a rare opportunity to buy shares in one of India’s greatest franchises.