HDFC has created significant value in its subsidiaries. Three of these-HDFC Bank, HDFC Life Insurance and HDFC Mutual Fund-are valued at Rs883 per share. They are also growing at a faster rate than HDFC. Separate listing of Insurance subsidiaries is on the cards too.
HDFC has gained significant market share in the past couple of quarters. Also, continuous CRR hikes by the RBI have benefited HDFC the most, as banks are unable to bring down their lending rates to protect their margins. HDFC doesn’t need to maintain CRR, hence its incremental spreads have widened as incremental borrowing costs have declined while lending rates have remained stable.
Core mortgage business is expected to grow at 25-30% over the next couple of years. In Q2FY2008, HDFC’s margins expanded and the core operating performance was very strong (up 56% yoy). We expect the earnings before exceptionals to grow at 26% CAGR over FY2007-10E. NPAs are less than 1%
HDFC is expected to report an EPS of Rs 72, 90 and 109 for FY08, 09 and 2010 respectively. Valuing the core mortgage business at 22x its FY2010E earnings
per share (EPS) and adjusting Rs 954 for the value to its subsidiaries, Sharekhan sets a target price of Rs 3,360.