HDFC stock sees first downgrade by analysts since liquidity crunch

Nomura, on Tuesday, cut its recommendation from 'Buy' to 'Neutral' citing fair valuations

Housing Development Finance Corporation (HDFC), the mortgage giant and the most preferred non-banking financial company (NBFC) stock, witnessed its first rating downgrade by analysts on Tuesday. Nomura turned 'neutral' on the stock after being 'positive' since December 2017. The HDFC stock was marginally in the red due to this. The timing of the rating action is interesting as this is the first rating change for the stock since the liquidity crisis unfolded in September 2018.

On a year-to-date basis, the HDFC stock has risen 11 per cent. This has prompted analysts at Nomura to turn neutral on the stock. They say at current valuations of 18x FY21 earnings or 2.3x FY21 price-to-book estimates, valuations appear quite fair based on 15 per cent net interest income (NII) growth and return on equity (core business of housing finance) of less than 15 per cent based on estimates for FY19-21. 

Nomura's action also follows a challenging period - the March quarter that just went by. HDFC's cost of funds rose about 40 basis points year-on-year (YoY) to 7.98 per cent and restricted net interest margin was at 3.3 per cent. The lender was also cautious on developer loans (22 per cent of its loan book), which grew only 7 per cent while it exercised prudence in its retail lending business, up 14 per cent YoY. Overall loan growth at 12 per cent was one of the slowest in many years. 

The Street remained confident on HDFC after its Q4 numbers, as it demonstrated the lender's ability to wade through a tough phase. However, a few brokerages started moderating their expectations. Analysts at Emkay Global slashed their NII and net profit expectations for FY20 by 15 per cent and 7 per cent to Rs  13,358 crore and Rs 11,778 crore, respectively. 

Shweta Daptardar of Prabhudas Lilladher said HDFC's NIMs might stay at current levels of 3.3 per cent in FY20-21 as she foresees increased competition from public sector banks tapering their home loan rates. On asset quality, Nomura said: "We expect significant risk in builder financing for the system. HDFC's growth has been lower than its peers, but we expect some pressure to show in HDFC's builder financing portfolio." 

These uncertainties and a sharp re-rating cap the upside potential for the stock. Though majority of analysts polled on Bloomberg still have a 'buy' on the stock, their 12-month target price of Rs 2,238 translates to a 2.2 per cent return potential from current levels of Rs 2,190.