Why HDFC stock is down more than 20% from its all-time high

A constituent of BSE Sensex and NSE Nifty.

A rock-solid balance sheet.

A good track of asset quality with zero net non-performing assets (NPAs). Consistency of paying dividend with a payout of more than 20%,

a dominant market position.

If you stack these factors together, it will be difficult to make a case for not investing in Housing Development Finance Corp (HDFC) stock.

However, the reality is something else.

Share price of India’s largest mortgage lender HDFC is down in the dump. Among other things, the company appears to have been mired in broad-based sales amid the Russia-Ukraine crisis.

22%. That is, how much has the stock fallen from its 52-week high.

This is all for the firm which is touted as one of the best ways to drive India’s growth story.

Why is HDFC upset in the stock markets?

on February 2, HDFC released quarterly results And since then, it’s on a downward trend. So is the stock under pressure because of its results? Or is this just a coincidence?

For the quarter under review, HDFC reports 11% growth in net profit $32.6 billion due to higher income and lower-than-expected loan losses.

Net Interest Income (NII) has grown by 7% 42.8 billion

Asset quality deteriorated slightly as the lender recognized some loans as non-performing, which were overdue for less than 90 days.

Quite a solid set of numbers, isn’t it?

So, if it’s not business, it must be geopolitical tensions.

As far as we know, HDFC has no direct links with any of the countries engaged in the war. In fact, it is solidly focused on the domestic market.

And the mega trend the business is riding is expected to last for many years if not decades.

If it isn’t either, what could be the reason?

In a way, the reason for the sell-off is quite mundane.

The US Federal Reserve’s decision to tighten monetary policy and geopolitical tensions have spurred safe haven purchases.

Now don’t let this era scare you.

This means that global money that was looking for returns in all kinds of markets is now flowing back to its home country. And since there is a US for this kind of flow, the money is flowing back to the US.

So how does all this affect the share price of HDFC?

Well, selling by Foreign Institutional Investors (FIIs) is sure to affect the overall sentiment in the market.

The more FIIs sell, the more damage will be done to the share prices.

If you are a keen follower of the markets, then by now you know that FIIs are selling Indian equities in a big way.

According to a report, in the year ending March 2022 so far, FIIs have net sold shares worth more than US$29 billion ( 2.22 lakh crore). Curiously, 80% of it was sold in the last five months.

Now that the common investor is reading this headline saying that everything is ruined…

Step back and think a little.

In a situation like this, when FIIs are forced to sell stocks to send money back home, what do you think they will sell?

Whatever they can do.

And that’s where things get interesting, dear reader.

You see, FIIs have held a major share of HDFC over the years. Like we said this is probably one of the best ways to play the Indian opportunity.

Now, when they are “forced” to sell, they have no choice but to sell their original holdings as well.

Hence, there is a sell-off in HDFC and other HDFC group stocks, which have been FII favourites.

Take a look at this…

Stocks like highly foreign-owned ICICI Bank, Infosys have also sold out.

Take a look at the table below which shows the top 10 stocks with the highest FII exposure and how they have fared…

As can be seen from the table above, even though the companies posted good results or beat the Street estimates, they sold out due to high FII holdings.

Axis Bank, Apollo Hospitals, IndusInd Bank and others performed well in the December quarter, but remained in the shadow due to FII selling.

While we cannot say that stocks are falling mainly because of FII exposure, it seems that FII sell-off was probably a major factor.

But the fall was under control and the impact of FII selling was limited, all thanks to retail investors.

For quite some time, FIIs have to some extent commanded the Indian stock markets. Any sudden increase or decrease in FIIs has given rise to the shares.

But this time it’s different.

2021 showed us how India’s dependence on FIIs has reduced. The participation of retail as well as domestic institutions is now important. Even if the slowdown in FIIs persists, India’s growth story will remain intact.

Let’s talk about the second important factor behind the poor performance of HDFC…

The Reserve Bank of India (RBI) recently decided to maintain status quo on key policy rates, saying the lower interest rate regime will boost the growth of the housing sector.

HDFC is primarily a retail home loan lender, with personal loans making up more than 75% of its book, benefiting from these low interest rates. Low interest rates, among other factors, are a trigger for higher demand for loans.

But there could be headwinds going forward in the form of an increase in interest rates.

While analysts are seeing this as a concern, the company’s management is indicating something else. HDFC Chairman Deepak Parekh recently said that even though the interest rate cycle may go up and down, customers who want homes will not hold back.

Is HDFC All Negative Prices After 20% Drop?

Now the all-important question would be asking investors whether they should buy HDFC in the midst of this stock market sell-off?

Is this a good time to buy this winner for the future?

Let’s look at the rationale for understanding the risk-reward position.

Ride High on India’s Real Estate Cycle

The improvement in HDFC has certainly made it an attractive investment opportunity at the current level.

One of the main factors supporting HDFC is the strong demand for housing.

Parekh was quoted as saying that housing affordability levels in the Indian property market are at their highest and are unlikely to be adversely impacted in the near term as incomes are rising faster than real estate prices.

Prices have remained fairly stable and low interest rates have helped. HDFC being India’s largest and most trusted mortgage finance company, is poised to deliver better leverage than any other corporate in India’s real estate cycle.

talk about continuity

Another helpful claim for HDFC is its track record of paying dividends.

HDFC is a compatible . Isdividend growth stock, Its last 4 dividends are equal to 1,000% of the face value.

So even if the stock falls some more from current levels, investors won’t complain because they’ll be earning passive income through dividends.

A company with an attractive stock portfolio

HDFC together with its wholly owned subsidiaries, HDFC Investments and HDFC Holdings, holds a 21.1% stake in HDFC Bank.

It also holds 49.9% stake in HDFC Life and 52.7% in HDFC AMC.

HDFC plans to list its unlisted subsidiaries such as HDFC Ergo and HDFC Credila in the coming years. It is also committed to investing 1 billion in technology start-ups every year.

Even if some of them turn out to be reliable investments for HDFC, they can deliver massive returns for the investors.

To finish…

In a sector that is very closely linked to the macro environment, HDFC’s ability to maneuver through market cycles with exceptional capital allocation sets it apart from other NBFCs.

As we mentioned earlier, HDFC has been the ultimate wealth maker in the Indian stock markets.

So, will HDFC continue its slow and steady journey and climb upwards?

Given its flexible balance sheet, consistent margins and impeccable asset quality, this is a good turnaround to happen over the long term.

Happy investment!

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

This article is syndicated from equitymaster.com