HDFC Q1 results cheer up Street; analysts see up to 31% upside

NEW DELHI: HDFC's June quarter profit met Street estimates. Its collections were back to pre-Covid levels, net interest margin (NIM) recovery was strong and asset quality remained firm in an otherwise challenging quarter for home finance companies (HFCs). Analyst targets on the stock suggest up to 31 per cent upside.

Edelweiss said HDFC’s relatively safer assets provide comfort and Covid-19 does deepen its competitive moats. The crisis has touched HDFC too, it said, but the outcomes have been better than initially thought of.

The HFC has reported a standalone profit of Rs 3,000.67 crore for the June quarter down 1.69 per cent over the year ago's Rs 3,051 crore. Net interest income (NII) rose 22 per cent to Rs 4,147 crore from Rs 3,392 crore YoY. Net interest margin (NIM) came in at 3.7 per cent compared with 3.5 per cent in March quarter and 3.1 per cent in the year-ago quarter.

Loans to individuals climbed 22 per cent, and there was a sharp revival in disbursements through July after some disruptions in June quarter.

"While subsequent covid wave possibilities do add some uncertainty, individual loans proportion (75 per cent), low restructuring (0.9 per cent of AUM) and provision stock (2.6 per cent of AUM) lend comfort against stress eventualities. A relatively bounded outcome on asset quality, liability strength and post-crisis market share gain help," Edelweiss said.

Nirmal Bang Institutional Equities sees HDFC in a far better position from an overall asset quality standpoint compared with LIC Housing.

"Overall provisions remain healthy at 2.64 per cent of loans. Credit cost should gradually start reverting to normalized levels from hereon, which would lead to higher profitability. While the company would continue with a conservative and proactive provisioning stance, a faster-than-expected recovery could lead to write-backs and faster credit cost normalisation," it said. The brokerage has a price target of Rs 3,120 on the stock.

Motilal Oswal Securities pegged the stock's value at Rs 3,290. It noted that recovery in disbursements was much stronger than expected at the start of the second Covid wave. July’s disbursements, it said, were the third-highest ever and the highest ever in a non-quarter month-end.

This brokerage believes declining cost of funds and a reduction in excess liquidity should aid margins for the bank despite pressure on retail lending yield due to continued aggression from banks in the mortgage space.

On Tuesday, the stock traded at Rs 2,518, up 2.3 per cent. Kotak Institutional Equities finds HDFC as the best mortgage play in India, thanks to a strong debt market position, large provisioning buffer, and favorable valuations. It has a target of Rs 3,100 on the stock. JM Financial sees the stock at Rs 3,020.