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Stock watch: HDFC banks on asset quality

Once in a while, market throws up opportunities that are hard to miss. HDFC is one such case.

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Once in a while, market throws up opportunities that are hard to miss. HDFC is one such case.

The stock has taken a hammering after Morgan Stanley Capital International (MSCI) reduced its index weightage. While many other companies have seen their weightage tweaked on different parameters, in HDFC’s case, it was due to FII ownership in the company. There is nothing fundamentally wrong with the decision.
The weightage of the company has been cut to 0.19% from 0.38%, which might prompt some funds mirroring the MSCI to sell shares to rebalance their portfolio. Reports have put the sale at 2.78 crore shares worth around Rs1,800 crore.

The crux of the problem is the cumulative holding of FDI and FII in the company, which stands at 71% compared to a ceiling of 74%. The FII holding went up on account of a 9.5% stake sale from Citibank as the transaction fell under the FDI category. Carlyle, too, slashed its stake by selling 1.3% of the company’s capital. FIIs, in turn, picked them all up, who raised their stake in the company from 59% in December 2011 to 65.8% in March 2012. Now, there is little room left for FIIs to buy any shares, hence MSCI action.

HDFC, on its part, is seriously looking at increasing the FII limit to 100% of its capital. If this does go through, chances are weightage of the company will gain strength. Till then, there can be selling pressure at the counter. This, however, offers a good chance to enter as the recent set of numbers shows that the company is on a strong wicket.

In the fourth quarter ended March 31, 2012, the company notched up a 23% growth in profit before sale of investments and tax at Rs1,745.08 crore as against Rs1,420.38 crore in the previous fiscal. After accounting for lower sale of investment, the company posted a net profit of Rs1,326.14 crore, a jump of 16%.

Sequentially speaking, mortgages grew 6.6% to Rs1,40,875 crore. Both corporate and retail put up a strong growth show at 19% and 21%, respectively. Retail accounts for 63% of the loan book.

There was a marginal reduction in spreads at 2.27% compared to 2.33% in the previous year though. Net interest margin of the company was steady at 4.4%.

There are no signs of strain on its assets, with gross non-performing assets at Rs1,069 crore, equivalent to 0.74% of the portfolio. This is the 29th consecutive quarter in which the company’s non-performing assets are down compared to the year-ago period.

The strong asset quality of the company has withstood the overall depressing scenario in the housing and construction sector. Its strict due diligence has paid off, which is what has prompted FIIs to hold on to the stock. Very few housing finance companies in the global market have the kind of asset quality that HDFC has.

Irrespective of the MSCI weightage, the stock has the potential of attracting FII investors on the basis of its fundamentals.

Technically speaking, the company has taken support at around the Rs610-620 levels. The recent round of selling can be absorbed around these levels before a rally can take it to its previous top of Rs680.

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