CLSA downgraded Housing Development Finance Corporation (HDFC) Tuesday after the country's largest mortgage financier reported a 32 percent year-on-year rise in net profit in the quarter ended September. The net profit, aided by a sharp rise in dividend income, stood at Rs 3,780 crore. It had posted a net profit of Rs 2,870 crore in the year-ago period.

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While the company beat the street estimates, CLSA downgraded the stock from 'buy' to 'outperform' stating that "return expectations do not meet our 'buy' rating threshold." However, the brokerage raised the target price from Rs 3,000 to Rs 3,250. An outperform rating means a company will produce a better rate of return than peers, but the stock may not be the best performer.

"We increase our estimates by 2-3 percent for FY23/24CL due to normalising credit costs. While the turning rate cycle bodes very well for HDFC's growth outlook and we maintain our positive stance, our new Rs 3,250 target price implies only 13 percent upside and hence we downgrade our recommendation one notch," CLSA said.

Also Read | HDFC shares give up gains soon after rising 1%; CLSA downgrades rating to 'outperform'

Strong growth momentum

HDFC's asset under management (AUM) registered a growth of over 15 percent year-on-year. And its core net interest income (NII) rose 13 percent YoY, but CLSA said it was marginally lower than expected. Overall stage-3 assets were flat with some increase in builder non-performing assets (NPAs), while individual NPAs fell by 14 percent QoQ

"With improving real estate cycle, we expect 15-16 percent NII growth over FY21-24CL (vs just 8 percent over FY15-20) but see its valuation at close to fair levels now, and hence downgrade our rating from buy to outperform," CLSA said.

The company's management highlighted momentum in October was very strong and growth improvement is becoming broad-based now and with even markets like NCR seeing traction.

As the affordability improves with low rates and improving real estate volume, the brokerage said it expects the company's individual growth to rise by 17-18 percent, adding 15-16 percent to overall AUM growth over FY23 and calendar year 24.

Also Read | HDFC bets on affordability, says best time to buy house; sees growth in higher income category

Margins: The best may be behind us

The mortgage financier reported a drop in margin by 10 basis points from very high levels in the previous quarter. NII growth for this quarter rose by 13 percent YoY and it was marginally lower than what CLSA expected. Plus, its lending yields fell by 25 basis points.

Further, easy liquidity and low wholesale rates improved net interest margin (NIM) by 30-40 basis points.

"With a turning rate cycle the best for margins for housing finance companies (HFCs) like HDFC may be behind them," CLSA said. And since the base just got more difficult for the company, the brokerage expected NII growth to now track AUM growth.

Asset quality

HDFC's asset quality improved as its stage-3 assets declined 14 percent as compared to the first quarter. It reported an improvement of 600 basis points in provision cover.

While its stage-3 NPA increased 11 percent in the second quarter, as compared to the previous one, HDFC continues to maintain a healthy provision cover of 73.5 percent on the corporate side, CLSA said.

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(Edited by : Jomy Jos Pullokaran)