Shares of Housing Development Finance Corporation (HDFC) plunged 3.8 percent intraday Tuesday. Goldman Sachs downgraded the stock to sell from neutral as it believes that the stock will continue to underperform broader Sensex and retail private banks on structurally lower growth and profitability.
The brokerage also slashed target price to Rs 990 from Rs 1,190 earlier as it cut FY17-18 earnings per share estimates by 9-13 percent to factor in lower lending spreads and higher credit costs.
According to Goldman, HDFC’s core business of corporate lending (30 percent of Q3FY16 loan book) is likely to be pressured by continued elevated levels of housing inventories (which is negative for volume growth and asset quality); new entrants such as private equity and non-bank financial companies causing growth/pricing pressure; and changes in regulations in the real estate sector.
HDFC delivered a 19 percent core profit after tax compound annual growth rate (CAGR) in FY05-15 driven by strong loan growth (22 percent CAGR) and healthy core return on assets.
The brokerage believes core earnings growth and profitability at HDFC have now structurally settled for lower. It expects core PAT to grow at 10 percent CAGR in FY16E-18.
According to Goldman, less profitable retail lending will be key driver for loan growth as corporate lending is unlikely to see substantial opportunities.
It feels core return on assets will decline further from 1.8 percent in FY16 to 1.6 percent in FY18, on subdued lending spreads and elevated credit cost on potentially higher slippages in corporate book though HDFC has had a strong asset quality track record.
Key risks are faster-than-expected pick up in non-retail growth, reduction in funding cost, and easing of competitive pressures in both retail/non-retail lending, says the brokerage.
At 15:05 hours IST, the scrip of Housing Development Finance Corporation was quoting at Rs 1,112.00, down Rs 44.05, or 3.81 percent on the BSE.
Posted by Sunil Shankar Matkar