HDFC's moderating growth a major concern for analysts

Goldman has downgraded the stock, expects net profit to grow at 10 per cent in FY16-18

The stock of HDFC fell over 3.6 per cent after a downgrade from ‘neural’ to ‘sell’ by Goldman Sachs. The reasons: Continued elevated levels of inventories in the housing sector, negative for volume growth for housing finance companies like HDFC, and entrants such as private equity and non-banking financial companies causing growth and pricing pressure, among others.

The report may have been the trigger on Tuesday, but the Street had started sensing the slowing growth earlier. HDFC’s stock, which has outperformed broader markets by a good margin over longer periods, has just managed to track the Sensex in the last one, three, six, and 12 months. Smaller peers LIC Housing and Indiabulls Housing have not only outperformed HDFC over longer timeframes but also in the last one year.

After delivering 19 per cent annually compounded growth in stand-alone net profit, driven by strong loan growth (22 per cent annually compounded), growth and profitability for HDFC have settled for lower levels. Goldman expects net profit to grow at 10 per cent in FY16-18. Though Bloomberg consensus pegs the number at 15.4 per cent, it is still lower than the past years.

Loan growth and net interest income (NII) have cooled from FY14-15 levels. Loan disbursement, which historically expanded 20 per cent, increased 17 per cent in the December quarter (Q3FY16) and the Street is bracing for a petered down growth of 13-14 per cent in FY16 and FY17. NII growth at eight per cent in Q3FY16 was also way off its peak rate of 25 per cent. Abhinesh Vijayaraj of Spark Capital expects this trend to continue till realty prices stay steep as HDFC has historically been value-driven.

Return on assets (RoA) has also come off its historical levels of 2-2.5 per cent to 1.8 per cent in Q3FY16. Goldman partly attributes the slow growth in high-yielding non-retail business for the fall in RoA. From 66 per cent in FY09, the less-profitable retail lending business accounted for 73 per cent in Q3FY16.

Though HDFC maintains its premium valuations versus peers, at a consolidated price-to-book value of 2.84 times, the asking rates have fallen from peak levels of 6.5 times. But, given its leadership position, majority of analysts remain positive.