Signage for HDFC displayed in Mumbai (Photographer: Adeel Halim/Bloomberg) 

Goldman Sachs Says HDFC Valuations Attractive 

HDFC Ltd.’s shares have beaten the benchmark Nifty 50 in the last one year. Goldman Sachs says India’s largest mortgage lender isn’t done yet.

Goldman Sachs upgraded the shares to ‘Buy’ from ‘Neutral’ and increased the target price to Rs 2,188 apiece—a potential upside of 15 percent.

The demand drivers for HDFC are getting better given a significant push by the government in the housing sector, the investment bank wrote in a report. The stock is available at an attractive valuation, it said, adding that earnings growth of the company will accelerate.

HDFC trades at 2.2 times its price-to-book multiple compared with a five-year average of 3.8 times. That’s the discount of 43 percent for the mortgage lender, according to the report.

HDFC returned 15 percent gains in the last one year compared with the 12.3 rise in Nifty. The stock is up 11 percent in 2018 and closed 0.6 percent lower at Rs 1,895 today.

The mortgage lender’s profit rose 40 percent year-on-year in the quarter ended March, beating analyst estimates. Goldman Sachs sees that as an inflection point amid rising confidence. It expects loan growth to rise at an annualised rate of 20 percent in three years through March 2021 compared with 16 percent in the previous five years.

Besides, the recent regulatory changes to foreign ownership of HDFC Bank Ltd. could reduce the risk of an expansion of the holding company discount, according to Goldman. Typically, holding companies are valued at a discount because of their diversified portfolio and a mostly dividend-based income from subsidiaries.

Contrarian View

Thirty-six of 42 analysts tracked by Bloomberg have a ‘Buy’ rating on this stock—four recommend ‘Hold’ and two have a ‘Sell’ call.

Among brokerages with the contrarian view is Ambit Capital, which has a ‘Sell’ on the stock since February last year. The valuation of the core lending business looks artificially inexpensive due to recent capital raise, it said. Ambit Capital expects bad loans and credit costs to increase due to rising non-performing assets in both home and developer loans.

Moreover, HDFC still remains expensive compared to its peers despite the recent correction in valuations to its five-year average.