Major housing demand is coming from first-time buyers – HDFC

Update on Indian Equity Market:

On Tuesday, NIFTY ended at 17,749 (-0.6%) as it closed near its high at 17,533. Among the sectoral indices, OIL & GAS (+1.3%), PSU BANK (+1.24), and METAL (+0.6%) ended higher, whereas REALTY (-3%), IT (-2.2%), and MEDIA (-1.7%) ended lower. Among the stocks POWERGRID (+4.4%), COALINDIA (+4.2%), and NTPC (+3.74%) led the gainers while BHARTIARTL (-3.7%), TECHM (-3.5%), and BAJFINANCE (-3.3%) led the losers.

Excerpts of an interview with Mr. Keki Mistry, Vice-Chairman and Managing Director of HDFC Ltd (HDFC) with CNBC TV18 on 27th September 2021:

  • Between 2017-2020, demand for housing was largely coming from Tier 2, Tier3 towns or outskirts of big cities but not that much in the center of big cities like Mumbai and Bengaluru.
  • In the last year, people in Mumbai, Delhi, and Bengaluru are buying houses because housing has become very affordable compared to what it has been in the last 20 years.
  • From 2017-20, prices in the center of big cities have remained the same or may have marginally come down. This was complemented by rising income levels of individuals. An average income level of 6-7% a year if compounded on a 3-year basis, gives an approximate increase of 25% against a 0% (virtual) increase in property prices.
  • So, the cost of a house as a multiple of the annual income of a typical customer has become a lot lesser.
  • Mistry believes that structural demand for housing will always remain strong since it is a very under-penetrated market. The factor that points towards a sustained growth of housing in the Indian market apart from increased affordability is a Mortgage-GDP ratio of less than 11%. This ratio ranges between 40-60% in Western countries.
  • Unlike people in the West, Indians prefer buying houses in their late 30s. From a demographic standpoint, two-thirds of India’s population falls in the under-35 age category which will eventually need to buy houses in the next 1-10 years. The average of a first-time buyer in Mumbai is between 37-39 years.
  • The pressure that this sector faced, particularly in big cities like Mumbai, has been quashed because bigger developers took over incomplete projects of smaller developers. But this process takes time because approvals from various authorities need to be obtained.
  • Demand in the industry is muted. Only the reputed developers are seeing traction because customers prefer buying an under-construction property from reputed developers rather than buying the same from a less reputed developer. That is because the risk of a project not getting completed is very little in the case of the former.
  • Collection numbers, from a retail standpoint, are back to pre-covid levels but, the distress that people encountered from April to June might not have gone away completely.
  • These problems are temporary as far as individual NPAs are concerned. He does not believe that the housing finance sector will see any severe loan losses because the security cover is huge and the average loan amount is a small component of the value of the property at origination.
  • The loan to value ratio (loan as a percent of the value of the property) for most lenders is less than 70% which means from day one the individual has a 30% equity in the property upfront.
  • Since all loans are paid equally in monthly installments, this ratio will keep declining every passing month as the installments get paid. Therefore, an individual’s equity in the property keeps rising, and the losses on a housing portfolio of any lender, as long as there is prudent lending, would be almost non-existent to very negligible.

Asset Multiplier Comments

  • The demand from homebuyers is picking up due to subdued interest rates and the government’s push towards the affordable housing segment.
  • Due to a higher focus on individual loans vs non-individual, and a greater share of lending to salaried individuals, HDFC’s loan portfolio did not suffer any major setbacks in terms of asset quality. Moreover, HDFC has a provision buffer in place which is higher than the regulatory requirement.
  • Due to increased demand and low interest rates, rising competition among housing finance companies could exert pressure on interest rates.

Consensus Estimate: (Source: market screener and websites)

  • The closing price of HDFC was ₹ 2,802 /- as of 27-Sept-2021. It traded at 5x/4x/4x the consensus BVPS estimate of ₹ 651/703/769 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 3,016/- implies a P/BV multiple of 4x on FY24E BVPS of ₹ 769/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”



Demand for Housing loans is strong – HDFC

Update on the Indian Equity Market:

On Thursday, Nifty closed in the red at 15,081. Among the sectoral indices, Media (+1.6%), and Realty (+0.1%) closed higher. Metals (-2.0%), Financial Services (-1.8%), and Financial Services 25/50 (-1.6%) closed in the red. Ultratech Cement (+3.9%), Adani Ports (+3.0%), and Shree Cement (+2.9%) closed on a positive note. JSW Steel (-2.9%), HDFC (-2.6%), and Hindalco (-2.6%) were among the top losers.

Excerpts from an interview of Mr. Keki Mistry, Vice Chairman  & CEO of HDFC with CNBC-TV18 dated 03rd March 2021:

  • Interest rates may bottom out by March-end and there is not much downside expected from current levels.
  • The demand for housing loans is extremely strong. In Q3FY21, individual loan disbursements were ~26% higher YoY for HDFC.
  • 3rd quarter of last year (2019) was not impacted by covid, which indicates that the growth was not on a lower base.
  • HDFC manages COF (Cost of funds) carefully which helps to manage spread in higher/lower interest rate scenarios. The incremental cost of borrowings is coming down, which led to rate cut by some players. HDFC will also take an ALM meeting to take a decision on this front.
  • He said that on a 9-month basis individual loans constituted 76% of total loans and 24% is non-individual loans.
  • In non-individual loans, 11% is construction finance and the rest is lease rental discounting. 80% of the growth came from individual loans and the rest from non-individual loans in 9MFY21.
  • There is a pickup in demand in every segment.
  • Speaking on projects, he said the builders are able to finish projects. Some projects are stuck and they are taking a bit more time to come around.
  • The company is not looking to raise capital.
  • The company is looking to list HDFC ERGO and HDFC Credila, however, it is still in the planning stage.


Asset Multiplier comments:

  • Cheaper home loan rates have helped people to buy homes. The Home loan rates are already at a 15 year low. This has acted as a trigger for rising home loans.
  • RBI has lowered its repo by 115 bps since March 2020, the bank has also passed these benefits by offering lower interest rates.
  • Many players like SBI, Kotak Mahindra Bank have announced a reduction in home loan interest rates.
  • Lower interest rates and lower stamp duty in some regions might act as a demand driver for residential real estate in India.


Consensus Estimate: (Source: Market screener and website)

  • The closing price of HDFC was ₹ 2,585 as of 04-March-2021.  It traded at 4.4x/4.0x/3.6 the consensus Book value per share estimate of ₹ 582/633/699 for FY21E/FY22E/FY23E respectively.
  • The consensus average target price is ₹ 2,921/- which implies a PB multiple of 4.1x on FY23E BVPS of 699/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Optimistic on future of the real estate, service sector to take longer to recover – HDFC

Update on the Indian Equity Market:
On Wednesday, Nifty ended 1.0% higher at 13,529 with banks outperforming. The top gainers for Nifty 50 were GAIL (+8.3%), Sun Pharma (+5.7%), and IndusInd Bank (+4.9%) while the losing stocks for the day were Nestle (-2.6%), Kotak Bank (-1.5%), and Titan (-1.3%). The top gaining sectors were Media (+3.8%), Pvt bank (+1.7%), and Bank (+1.5%). The losing sectors were PSU Bank (-1.0%), Metal (-0.5%), and Auto (-0.1%).

Edited excerpts of an interview with Mr Deepak Parekh, Chairman, HDFC dated 09th December 2020 from CNBC TV 18:

Mr Parekh is optimistic about the future of the real estate sector, especially the small homes. However, he believes the service sector is going to take long before it recovers.
The pain, the struggle and difficulty have been in close contact service sectors like restaurants, hotels, transport, civil aviation and these industries still have a long way to recover.

Mr Parekh said October 2020 was a record month for auto as companies saw all-time high numbers of sales.
On inflation, he said that the latest monetary policy has been mature and accurate although the inflation is higher than the comfort zone of the Reserve Bank of India (RBI). RBI has decided not to make any changes and leave the surplus liquidity into the system. He is confident RBI will not destabilize any large non-banking finance company (NBFC) or housing finance company (HFC) even if they don’t want to convert into a bank.

Speaking about NBFCs, Mr Parekh said that there needs to be a change in the RBI Act for corporates to enter the banking system. He does not see it happening immediately. It’s a 2-3 year process. However, in the end, RBI will be more conservative and cautious in their usual style and manner and will differ giving licences to corporate houses.
On the GDP front, Mr Parekh said that 2Q has surprised everyone; although the gross domestic product (GDP) showed a negative growth rate for 2Q, one should look at it as an aberration.

One never expected that September and October would see such fantastic new inflows of application in e-bills, tolls or housing sector compared to previous September-October, which was pre-pandemic.

Consensus Estimate: (Source: market screener website):

The closing price of HDFC was ₹ 2,308/- as of 09-December-2020. It traded at 4.0x/ 3.7x/3.4x the consensus Book value per share estimate of ₹ 569/615/674 for FY21E/ FY22E/ FY23E respectively.
The average consensus target price of ₹ 2,106/- implies a PB multiple of 3x on the FY23E book value of ₹ 674/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

We expect many M&A opportunities in our subsidiary businesses- HDFC

Update on the Indian Equity Market:

On Tuesday, NIFTY closed in the green at 10,471 (+1.5%). Top gainers in NIFTY50 were Bajaj Finance (+9.3%), Larsen & Toubro (+6.7%) and IndusInd Bank (+6.5%). The top losers were Reliance (-1.4%), Bharti Airtel (-0.6%) and VEDL (-0.1%). Top sectoral gainers were PSU BANKS (+3.4%), REALTY (+2.9%) and PVT BANKS (+2.7%) and there were no sectoral losers.

Excerpts of an interview with Mr. Keki Mistry, CEO, HDFC with Economic times dated 22nd June 2020:

  • Over the next one-and-a-half to two years, a number of opportunities will come up to make investments. They will look at good M&A transactions not just in the mortgage business but also in their subsidiaries – be it life insurance, general insurance, or AMC.
  • If such an opportunity does come up, then they do not want to start looking at whether they have adequate capital or not. That’s why at this point they want to take an in-principle approval from shareholders, which would take about five to six weeks roughly.
  • After they get the approval, they will be ready with some plan; whether they would do equity or do some other instrument which will convert into equity at a future date.
  • Today the plan is that out of that Rs 14,000 crore, some part will be pure equity and some part will be an instrument convertible into equity at a future date – could be two years later, three years late.
  • One must also remember that every rupee they invest into their subsidiaries reduces resources from a tier one point, and therefore, the need for capital at that point of time. It impacts their capital ratios.
  • When they invest, say, Rs 5,000 crore into a subsidiary, that sum gets deducted straight away from their net worth and capital for the purpose of calculating capital issued. So that is the only reason why they are looking at capital raising.
  • Whenever they believe the opportunity is right and it is a good time to go to the market that is the time they will reach out to the market. Their capital adequacy as of March 31, 2020, for tier one capital was 16.6% and total capital was 17.7%.
  • Housing loan is a lot more secure, than a car loan or a consumer loan or a personal loan. The reason being that is the advance has already been paid for a property, which always has a value.
  • This is obviously a much greater crisis than we had in the past, but what we had in 2008-2009 was also an economic crisis and to some extent in 2002, 1992, 1998 and at various other points of time.
  • In the short term, one might see non-performing loans inch up, but once normalcy comes back, non-performing loans will come back to normal levels. Something similar will happen this year also.
  • Recovery is on track, which has been a lot faster than what he would have expected it to be. The entire month of April was lockdown, offices were shut and there was very little business that they could do. They could do some disbursements, but that was for loans taken earlier.
  • What they have seen from the second half of May is that with every passing day, loan disbursement is getting better and better compared with what it was in the previous year. That trend has fortunately remained.
  • Business is picking up, disbursements are picking up. As there was little business for one-and-a-half months, they are still not close in their average.

Consensus Estimate: (Source: market screener and websites)

  • The closing price of HDFC Ltd was ₹ 1,843/- as of 23-June-2020. It traded at 3.5x/ 3.2x the consensus book value of ₹ 529 /571 for FY21E/22E respectively.
  • The consensus price target of HDFC Ltd is ₹ 1,982/- which trades at 3.5x the FY22E book value of ₹ 571/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Demand for home loans will rebound – HDFC

Update on the Indian Equity Market:

On Tuesday, Nifty ended marginally lower at 9,029. Among the sectors, Metal (+2.7%), Auto (+1.5%), and Realty (+1.2%) were the top gainers. IT (-1.9%), Pharma (-1.2%), and Media (-0.2%) were the only losers. JSW Steel (+5.9%), Eicher Motors (+5.7%), and Titan (+5.0%) led the gainers while Bharti Airtel (-5.9%), Bajaj Finserv (-5.1%), and TCS (-3.5%) ended in the red.

Excerpts from an interview with Mr. Keki Mistry, Vice Chairman & Chief Executive Officer, HDFC with BloombergQuint on 25th May 2020:

  • HDFC is offering a moratorium to all the customers. 79 percent of the borrowers have said they do not need it. A higher number of non-individual borrowers have opted for the moratorium compared to the individuals.
  • Since some developers are facing liquidity issues due to the lockdown, HDFC has to give them moratorium. The large developers are able to service their loans, with or without sales. Small and mid-sized developers have asked for the moratorium.
  • HDFC has not slowed down lending and is looking for fresh lending opportunities. In Mumbai and Madhya Pradesh, the offices are not open leading to slower disbursements. The offices which are currently open are working at 33 percent capacity and there will be a slowdown in disbursements during 1Q FY21. HDFC expects that 2Q FY21will be better than 1Q FY21 and consequently, 4Q FY21 will be back to 85 to 95 percent of normal levels.
  • Owning a home continues to be an important aspect of the lives of Indians. The lockdowns imposed in the aftermath of the virus outbreak has forced people to work from home, relying on internet connections and video conferencing apps. This trend could push people to buy larger homes or ones with a separate study room. Joint families could split into smaller units going forward meaning more people will be buying their own houses.
  • In the short term non-performing loans could rise but in the medium-to-long term, NPLs are expected to reduce. They have continued to tweak the credit underwriting model given the current situation.
  • In the affordable housing segment, the average loan size is Rs 17.7 lakh and most of the customers are salaried customers and not self-employed. The risk from job-losses or income cuts and its impact on NPLs is probably higher than in the pre-crisis period. There are co-borrowers to a mortgage, so if one person loses a job or faces a salary cut, they generally still do not default.
  • HDFC will be looking for opportunities to raise money. The liquidity level has been increased from around Rs 6,000 crores last year to around Rs 30,000 crores this year. HDFC has been recently sanctioned Rs 750 crores loan by the National Housing Bank recently.

Consensus Estimate: (Source: market screener website)

  • The closing price of HDFC was ₹ 1,506/- as of 26-May-2020. It traded at 2.8x/ 2.6x the consensus book value estimate of ₹ 531/ 574 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 2,406/- implies a PB multiple of 4.2x on FY22E BV of ₹ 574/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”


No need for retrenching employees, call on pay cut will be taken soon: Keki Mistry, CEO of HDFC

Update on Indian equity market:

Indian markets opened on Wednesday higher but erased all the gains towards the end as Nifty closed 69 points lower at 9,196. Among the sectoral indices, six out of 11 indices closed in the red led by FIN SERVICES (-2.8%), BANK (-2.2) and PVT BANK (-2.1%) whereas FMCG (4.2%), REALTY (1.8%) and MEDIA (0.9%) were the highest gainers.  Within the index, KOTAKBANK (-5.7%), HEROMOTOCO (-4.7%) and BAJFINANCE (-4.4%) led the index lower while UPL (8.0%), HINDUNILVR (5.4%) and BRITANNIA (5.2%) closed the day higher.

Edited excerpts of an interview with Mr Keki Mistry, CEO, HDFC published on CNBC TV18 on 14th April 2020:

  • Sharing his views on the announcements made by PM Modi on 14th April, Mr Mistry said that there will be calibrated reopening of the economy. Certain industries which are very critical and necessary for the smooth functioning of the economy might be a part of this calibrated reopening starting from 20th
  • According to him, the critical thing at this point is to ensure that there is enough liquidity in the system.
  • He made a request to the Reserve Bank of India (RBI) to provide funding to the National Housing Bank (NHB), which is 100% owned by the government. Through the NHB, the RBI can provide the funding to Housing Finance Companies and something similar could be done for Non-Banking Financial Companies.
  • According to him, certain sectors of the economy like hospitality, hotels, airlines, real estate have been badly hurt by the crisis. They need some sort of a special stimulus.
  • Commenting on the cost-cutting measures, he said that the salary cost is not a major expense for the company as about 1.5% of the total expenditure for HDFC is spent on salaries.
  • The company currently has 3,500 employees and he believes that there will be no need to look at retrenching employees. Pay cuts are being studied on a day to day basis and the company will come out with something in the coming days.
  • He said that retrenchment and pay cuts could be a problem in certain sectors. However, in the financial sector, retrenchment may not be a major concern.

Consensus Estimate: (Source: market screener, investing websites)

  • The closing price of HDFC was Rs 1,594/- as of 15-April-2020. It traded at 3.2x/ 2.9x/ 2.7x the consensus Book Value estimate of Rs 506/ 544/ 598 for FY20E/ FY21E/ FY22E respectively.
  • The consensus target price of Rs 2,594/- implies a PB multiple of 4.3x on the FY22E BV estimate of Rs 598/-

Excerpts of an interview with HDFC Chairman Mr Deepak Parekh published in Mint dated 4th September 2019

Dated: 6th September 2019

Update on Indian market: Nifty ended almost flat on Thursday (+0.03%). Within NIFTY stocks, top performers were Tata Motors (+8.1%), Coal India (+7.3%) and ONGC (+5.3%) and worst performers were HDFC (-2.8%), Indiabulls Housing (-2.3%) and ICICI Bank (-2.2%). Among the sectoral indices, best performers were Metal (+2.6%), Auto (+2.1%) and Media (+1.6%). Worst performing sectors were Realty (-1.8%), financial services (-1.2%) and Pvt Banks (-0.8%). RBI has mandated linking of housing and auto loan rates to the repo rate or other external benchmarks 1st October onward. Stock prices of HFCs (Housing Finance Companies) were down owing to the fear that HFCs will have to reduce their lending rates to remain competitive, effectively putting pressure on NIMs (Net Interest Margin). Auto stocks reacted positively to the same as lower borrowing costs to the customer can boost demand for vehicles.

Excerpts of an interview with HDFC Chairman Mr Deepak Parekh published in Mint dated 4th September 2019

·        In HDFC’s core business of housing finance, massive growth is seen in affordable housing. HDFC has launched a dozen projects in the last 3 months across Indian cities. Apartments that fit in the Pradhan Mantri Awas Yojana (PMAY) are selling fast. 70-80% is sold on the launch day.

·        Commercial real estate especially for IT back-office sector is also booming.

·        Real estate is in bad shape for homes that are larger and unaffordable.

·        The spiral down has continued after demonetization. The developers need help as without them there is no supply. There is a massive amount of unsold inventory and lack of fresh lending to the developers.

·        Regulators have to look at developers differently in terms of NPA recognition. Even if the developer is not able to build a phase due to demand shortage and is not able to repay the loan, he is sitting on the value in the form of land. When the demand picks up, the value will materialize.

·        50% of incomplete apartments need last-mile funding where 80%-90% work is complete. That should be done on an urgency basis. This will also boost confidence on the street. Currently, people prefer to buy a finished home rather than under-construction property as many people have booked under-construction flats and are still waiting. A solution could be a stressed asset fund initiated by National Housing Bank (NHB).

·        When IL&FS went down, it did not impact the Indian financial system. India has a strong financial base and a couple of players collapsing is not going to have a big impact.

·        Interest rate action helps in case of a slowdown but it is not the ultimate reason for the slowdown to go away. Self-confidence and confidence in buyers is required. India is a consumption-oriented economy and one or two-quarters slowdown is just part of the game. Even the auto industry has had phenomenal sales for many years and a slowdown for a few quarters will not have much impact.

·        The feeling is that slowdown will be short-lived. Good weather, upcoming festive season and easy availability of credit will cause spending.              

·        Consumption as a % of GDP is very low in India, less than half of China. So that has to grow. Even if there is a global slowdown, it is not so in India.

·        Ease of doing business in India has to improve. Large funds of billions of dollars have not yet invested long-term money in India. India specific funds have come in but global funds, sovereign wealth funds have just started looking at India. Still, massive amounts of investments can be expected from Australia, Canada and Japan. The sovereign wealth funds are underinvested in India but are looking at viable companies, good promoters and good track record.

Consensus estimates (Source: Marketscreener website):

·        The share price on 05-09-2019 was Rs 2,044/- per share. It was trading at a P/B of 4.2x/3.9x its book value per share estimates of Rs 479/521 for FY20E/FY21E respectively.

·        The consensus price target is at Rs 2,361/- implying P/B of 4.5x for FY21E BVPS of Rs 521.