Is now a good time to invest in HDFC shares??

HDFC Analysis

COMPANY ANALYSIS

RTI For Money, Lillaney

7/8/20231 min read


  1. What is a good investment?

  2. What are the factors to be considered while analyzing financial services companies?

  3. How does HDFC (Housing Development Finance Corp) perform on these factors?

  4. Is HDFC (Housing Development Finance Corp) a good investment at this time?


1. What is a good investment?


Ben Graham defined an investment as below:


“An investment operation is one which, on thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”


If I had to invest any amount I would look at the following criteria.


What’s the current rate of inflation?

How much are the bonds yielding, especially the 10Y?

Are there any investments which can give me more return than the bonds above?


The answers currently as on 01-07-2023 according to me would be as follows:


Around 4-5%

Around 7%

Investing in an index ETF has returned over 7% in the last 10 years if I am not wrong.


From the above it seems that at a minimum we should target a return of more than 7% for any investment that we make at present considering the data points above.


But how do we know if HDFC (Housing Development Finance Corp) can give us more than 7% returns in the upcoming period?


2. What are the factors to be considered while analysing financial services companies?


The following ratios can help us to know if a finance company is a good investment.


a. ROE over the last 10 years

b. Profit Margins over the last 10 years

c. Non Performing Assets Ratios over the last 10 years

d. Leverage (Debt / Equity) over the last 10 years

e. Coverage ratios over the last 10 years



3. How has HDFC (Housing Development Finance Corp) performed on these factors over the last 10 years?


a. ROE over the last 10 years


ROE has been between 11% and 21% in the last 10 years.


b. Profit Margins over the last 10 years


Margins have been in the range of 21% to 30% in the last 10 years.


c. Non Performing Assets Ratios over the last 10 years


NPAs have been below 2% in the last 10 years.


d. Leverage (Debt / Equity) over the last 10 years


Leverage has been between 200% and 300% over the last 10 years.


e. Coverage ratios over the last 10 years


Provisions at more than 2% of loans.


4. Is HDFC (Housing Development Finance Corp) a good investment?


Based on the above factors HDFC (Housing Development Finance Corp) seems to be satisfying the criteria of safety of principal.


Now let's look if it can provide a satisfactory return. Based on the CMP of ~2800 and EPS of 140 its yield is around 5% which is not a satisfactory return.


Now, if we consider that sales and profits have grown at more than 15% compounded for the last 10 years it means its sales and earnings could double every 5 years if it continues at the same pace.


Current earnings - say x

Earnings in 5 years - 2x

Earnings in 10 years - 4x

Earnings in 15 years - 8x

Earnings in 20 years - 16x


At the end of Mar 2023 , EPS was around Rs.140 and price was around Rs.2800 giving a P/E of 2800/140 which is approx. 20 and a bit on the higher side than normal.


If the above assumptions are correct the EPS in March 2043 would be 140*16 = Rs.2240.


Assuming a P/E of 20 the price would be 2240*20 = Rs.44800 which is 16 times the price of Rs.2800 at the end of March 2023.


If we consider a price increase of 16 times in 20 years it indicates a growth of around 15% which is a good return.


If you would like to know more about growth investing by which we assumed the returns and prices above, you can do so by reading the books below:


  1. Common Stocks Uncommon Profits by Phil Fisher - https://amzn.to/420BrGY

  2. Buffettology by Mary Buffett - https://amzn.to/3AU7cWw



Conclusion


Although HDFC (Housing Development Finance Corp) is a good quality business the price at which it is available does not promise a satisfactory return in the short term for a period of a year or so. However, if you have a longer time horizon like buying something for your kids and holding it for a few decades then HDFC (Housing Development Finance Corp) can give good returns if it continues to grow at the same pace as it has in the past.