HDFC shares tanked with Sensex but recovery remains astray; brokerages still bullish, check target price

With a warchest of Rs 11,000 crore HDFC might be ready to battle the coronavirus pandemic but with the stock gaining only 4% so far since its March lows, the question is will the share price gain steam?

With a warchest of Rs 11,000 crore Housing Development Finance Corporation (HDFC) might be ready to battle the coronavirus pandemic but with the stock gaining only 4% so far since its March lows, the question is will the share price gain steam? India’s largest mortgage lender saw profits fall 22% in the January-March quarter, largely due to provisions made by the bank that are Rs 6,800 crore over and above what the regulatory requirements demand. Top brokerage and research firms have trimmed the target price for HDFC but are not giving up their bullish outlook.

Although the real estate sector is not staring at a very rosy picture, for now, HDFC’s history of dodging the risk effectively is what Edelweiss Securities is expecting. The brokerage firm has a target price of Rs 1,850 per share for HDFC, down from its earlier target price of Rs 2,745. “Given the unprecedented challenges to real estate, we expect focus to remain on existing portfolio consolidation and operational frugality. We prune our growth/asset quality estimates leading to EPS cut of 21%/35% for FY21/22E,” it said. 

HDFC’s comments around the impact on business due to the coronavirus pandemic highlighted that the mortgage lender has 3% borrowers, not using electronic means to pay installments. This has forced collections to take a hit. Total outstanding advances stood at Rs 4.5 lakh crore, comprising individual loans at around 76% of book, balance 8% LRD, 11% construction finance and 5% large corporates. “…HFCs are prone to risk of deterioration in asset quality, especially on developers financing. HDFC Ltd, led by superior fundamental is expected to remain the undisputed leader within the pack with lower risks to survival thereby upsides remain capped,” said ICICI Securities in a research note while cutting its target price to Rs 1,770 from Rs 2,000. 

HDFC undoubtedly is still the top pick in the NBFC space for many analysts. Its capital buffer and provisions are expected to prove sufficient even in the case of a sharp rise in NPAs. A challenging macro environment for the developers prompted HDFC to go slow for the past several quarters and create large buffers. This, coupled with lockdown-related challenges and ensuing fatigue to the already sluggish real estate sector, will likely mean that asset quality performance will continue to remain weak, said Kotak Securities. “HDFC is trading at 0.9X core book FY2022E, i.e.at its trough valuations,” it added while pinning a fair value of Rs 2,150 per share on the scrip.

Emkay Global, with an optimistic target price of Rs 1,970 per share, appreciated the strong healthy operational performance of HDFC and the rising share of individual loan book. However, the possibility that HDFC might turn risk-averse in the short term remained a concern for analysts at Emkay Global. HDFC’s share price surged 4.81% on the BSE on Wednesday, ending the day at a price of Rs 1,571 per share.