HDFC Ltd. (HDFC) is India’s largest housing finance company (HFC) with assets under management (AUM) of over INR4.6t as of FY19. It is also the largest deposit-accepting NBFC with total deposits exceeding INR1t.

The company has successfully seeded various other entities in financial services space, such as HDFC Bank, HDFC AMC and HDFC Life Insurance.

HDFC stands out amidst this overall downcast liquidity scenario since Sep’18, given that it is able to (a) access long-term and short-term money at rates much lower than peers (five-year NCD at 8%, 365-day CP at 6.3%) and (b) eat into the market share of competitors as they go slow on disbursements.

There are concerns about the sustainability of loan spreads, given the liquidity scenario and the lower share of corporate lending. Yet, historically, with largely stable spreads/margins, HDFC has effectively managed both volatility in interest rates and competition.

A diversified liability profile (public deposits, where cost is sticky, account for ~30% of total borrowings) and a 60bp rise in home loan yields over the past year will likely help HDFC maintain spreads stable at ~2.2% over medium term.

We expect HDFC to deliver 14% AUM CAGR over FY19-22. Growth over the last two years was driven by volumes rather than value, which is positive. We expect this trend to continue, especially given the strong macro tailwinds in the lower-ticket size segment.

Largely stable margins and credit costs should drive core PBT CAGR of 12% over FY18-21. Core RoA/RoE (adjusted for interest routed through reserves and income/profit from subsidiaries) is expected to remain stable at ~1.7%/~14% over the medium term.

Disclaimer: The above report is compiled from information available on public platforms. inChat team advises users to check with certified experts before taking any investment decisions.

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