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What makes HDFC a safe bet
Sarath Chelluri in Mumbai | December 22, 2008
In the long run, growing urbanisation, rising disposable incomes and favourable demographics, will ensure that demand for housing would continue to remain robust.
HDFC's diverse loan portfolio along with superior lending practices de-risks its business model. Lower operating costs along with stable margins and high asset quality also ensure sustainable profitability.
The company's track record of successfully withstanding tough times provides comfort, which along with the value from its subsidiaries make HDFC a decent choice for long-term investors.
Diverse loan book
Retail mortgage accounts for around two-thirds of the total loan book. But, since most of the retail portfolio comprises of individual borrowers (more than 90 per cent of them borrow funds to purchase house for self-occupation), the default rates are minimal. The majority of the loan disbursals are to middle class -salaried employees along with greater focus in Tier 2 and 3 cities also ensures that the retail portfolio is well diversified. In the home mortgage market, HDFC has been increasing its market share, and further share can be garnered as most of the leading banks are going slow in lending.
In the Wholesale segment, advances to developers (about 12 per cent of total loan book) are in the focus, in the aftermath of weakness in the real estate sector. The falling demand for developed properties and lack of liquidity has put pressure on the developers, thereby increasing the chances of defaults. Thus, HDFC being a financier to real estate developers is also in the spotlight. To its credit, the disciplined approach by the company in these disbursals will ensure that HDFC is better placed compared to others. Among stringent norms include a low loan-to- value (LTV) ratio (proportion of loan value to property value) of less than 65 per cent and providing funds for property development rather than land acquisition. The rest comprises of funding to highly rated corporate and loans for acquisition of property in IT parks and industrial zones.
Disbursals moderating, funding decent
Although higher interest rates put pressure on the repayment ability of the borrower (customer), HDFC has been able to curtail any possible slippages (NPAs at around one per cent) through strict monitoring and lower LTV allowed to borrowers. The strong risk management systems and the recent decline in interest and property rates should help sustain lower NPAs, going forward.
Notably, the recent policy measures suggest that the pressure for companies like HDFC should start receding. The moves by RBI like reducing the risk weights on the loans and advances to commercial real estate, along with cut in CRR and repo rate would lead to lower lending rates. Additionally, RBI's has increased the limit for classification of housing loans as a priority sector advance to Rs 20 lakh. Since HDFC's average ticket loan size is around Rs 15 lakh, this should further ease liquidity.
In the long run, HDFC's track record of sustaining earnings in all the business cycles, an underpenetrated mortgage market, would ensure healthy returns for long-term investors.Apart from the housing loans business, HDFC has presence in the financial services space through its subsidiaries and associates, namely HDFC Bank (banking), HDFC Standard Life (life insurance) and HDFC Mutual Fund. With a combined value of around Rs 625-725 per share for HDFC from these businesses and any move on the proposed merger of HDFC Bank with HDFC should prove positive for the stock.
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