HDFC will benefit immensely from the recent consolidation in the NBFC sector on both the asset side (giving out loans) and on the liabilities side (funding from debt markets and retail deposits). Sharp decline in funding costs have significantly improved its ability to compete with banks in giving out loans to retail borrowers.

With concerns on asset quality of several wholesale/real estate focused NBFCs, debt markets have preferred to lend to NBFCs with conservative lending practices and strong parentages, while significantly reducing exposure to the rest. This, in turn, has meaningfully reduced the cost of funding for select NBFCs including HDFC, even while many of its peers struggle on the funding side. Other NBFCs that have witnessed a decline in funding costs are Bajaj Finance and LIC Housing Finance.

A quarter ago, analysts were concerned about the impact of repo rate-linked home loans on housing finance companies. However, a sharp decline in bond yields and cost of funding (down about 200 basis points year on year) have significantly improved HDFC’s competitive position, enabling it to offer home loans at rates marginally lower than those of the well-established retail banks.

Channel checks suggest that HDFC’s competitive position in the retail home loan markets has improved since October. Banks have preferred to keep interest rates high, while HDFC has kept its home loan rates marginally below those of frontline banks. With stable policy rates, HDFC will likely continue to retain its strong competitive edge, unless banks choose to cut rates aggressively.

Thus, there is a double whammy in play for HDFC; the twin benefit of lower funding cost which allows it to offer loans at rates lower than those of frontline banks. Core mortgage book (after netting off subsidiaries) is available at a valuation of approximately 2x FY21E book value. It is certainly a favourable proposition for a conservative investor who would like to invest in one of India’s best lending franchises.

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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