HDFC Ltd - Beneficiary of forthcoming inflation?

Housing Finance Companies (HFC):

While buying a house, a regular homebuyer pays down about 20-40% of the house’s price and borrows the rest. This is where HFCs come into play. They lend to these homebuyers at prevailing market interest rates and make money through interest. HFCs raise the money they lend either from banks, bonds, deposits and many other sources. The cost at which HFCs raise money is lower than the interest at which they lend, thus making the business model viable. The difference between these two interest rates is called the spread.

Spread = [Interest at which the HFC lends to homebuyers] - [Interest at which HFC raises funds]

When homebuyer is unable to meet his interest payment obligations, the house would act as collateral and the HFC would mark that loan as an NPA. So the main risk comes from a homebuyer unable to meet his interest payment obligations. Hence, riskier homebuyers (typically self employed) get loans at higher interest while safer homebuyers (typically salaried) get loans at lower interest.

There are other factors which influence the interest rate too, like RBI repo rate. If RBI repo rate is lower, then the prevailing market interest rates also would be lower and hence the homebuyer gets his loan at a lower interest rate. Similarly if RBI rate repo rate is higher, then the homebuyer gets his loan at a higher interest rate. However as investors of HFCs, what we need to care about is the spread. RBI repo rates influence both the interest rates i.e. interest at which the HFC lends and the interest at which the HFC raises money.

The housing loan market is really huge. AUM of the industry is Rs 22.26 lakh crores and grew 10% in FY21 despite COVID. At the same time, this industry has a huge scope for growth. There are lots of homeless families in the country and lots of scope for people with homes to upgrade their homes. Houses in developed countries are lot more superior as compared to houses in India. As India grows, its citizens would aspire to upgrade their homes similar to how they are in the developed economies. Also lifetime of a home is typically 30 years. So once a home is bought by a family, it doesn’t necessary mean that the family is lost as a customer to the industry forever. Their kids need to build their own house as they will have to renovate / buy a new house after 30 years. So there is a repeat business element in this industry, albeit with high amounts (as homes are expensive) and long cycles (as homes lifetime is huge).

Why is HDFC special in HFC business?

HDFC Ltd is a pioneer in Housing loans business in the country. It’s prudent culture has ensured that it withstood many ups and downs in India’s economic history since 1977. Since inception, written off loans (net of subsequent recovery) aggregates to Rs 3366 crores as of 31st March 2021, which is just 21 bps of cumulative disbursements since inception of the Corporation.

HDFC’s prudence is also reflected in its cost of funds throughout market cycles. During market turbulence, most investors turn to HDFC as flight for safety. These numbers speak a lot more about HDFC’s prudent lending than my words.

GNPAs have always been low at ~1% through out the past bunch of years. However currently Proforma GNPAs rose to 1.98% owing to COVID uncertainties. These loans are more than sufficiently provisioned by the management.

In lending businesses, companies which survive turbulence of the previous cycle end up gobbling up higher share in the next cycle as they eat into the share of companies which were struck poorly in the previous cycle. HDFC has been a beneficiary of this trend since decades.

HDFC Chairman Deepak Parekh is one of the most respected businessmen in the country. He is called upon during almost every financial crisis the country faces (IL&FS Crisis, Yes Bank Fiasco…). This reflects how well respected he is by the industry. All the subsidiaries / associates of HDFC Ltd (HDFC Bank, HDFC AMC, HDFC Life, HDFC Ergo…) are respected in similar fashion and are richly valued by the stock market.

Why HDFC Ltd now?

With inflation spiking up around the world, one needs to be careful on how they manage their investments. Anyone who has done a basic research on the 1970s Great Inflation in the US would have realized that Real Estate market gets really hot during high inflationary periods.

Hot real estate market catches every ones interest and would encourage people to buy homes raising money from Banks and HFCs. This would lead to increase in demand for home loans. Hot real estate market and inflation would also mean that the ticket size of those loans would increase too. So the benefits of inflation are two-fold to HFCs.

The industry was going through a tough time since the ILFS crisis. HDFC has become very cautious and didn’t grow their non-individual loan book. Non-individual loan book typically comprises of Construction Finance, Lease Rental Discounting. These are relatively more risky due to their ticket size, risk of completion of the construction project. With all the issues in past 4 years behind us (RERA, GST, IL&FS, COVID) and poor loans provisioned appropriately, I think HDFC is ready to grow the non-individual loan book too.

Due to above factors, I think HDFC Ltd is ready for the next wave of growth. Part of it is also reflected in its disbursals growth in past few quarters was COVID impact was minimal (42% in Q3FY21, 60% in Q4FY21).

Business Metrics:

2021 2020 2019 2018 2017
AUM (crores) 569894 516773 461913 402880 338478
AUM Growth 0.1 0.12 0.15 0.19 0.16
NIM 3.50% 3.40% 3.30% 4.00% 3.10%
Cost to income 7.70% 9% 8.90% 9.20% 7.40%
Spread 2.29% 2.27% 2.30% 2.29% 2.33%
Yield 8.99% 10.18% 10.29% 9.76% 10.64%
Cost of funds 6.70% 7.91% 7.99% 7.47% 8.31%
GNPA 1.98% 1.99% 1.18% 1.11% 1.02%
AUM Breakup 2021 2020 2019 2018 2017
Individual Loans 0.74 0.72 0.71 0.7 0.72
Corporate Bodies 0.25 0.26 0.27 0.28 0.26
Others 0.01 0.02 0.02 0.02 0.01
Total 1 1 1 1 0.99
Loan Sourcing 2021 2020 2019 2018 2017
HDFC Sales 54% 54% 54% 51% 50%
HDFC Bank 27% 26% 26% 27% 25%
Other DSAs 17% 17% 16% 16% 18%
Direct Walk-ins 2% 3% 4% 6% 7%
Total 100% 100% 100% 100% 100%


Top subsidiaries are HDFC Bank (owns 21.1%), HDFC Life (owns 49.97%), HDFC AMC (owns 52.7%) and all of them are listed. I would suggest to go through their threads in the forum to understand them further.

HDFC Bank => HDFC Bank- we understand your world
HDFC Life => HDFC Life Insurance Company
HDFC AMC => HDFC Asset Management Company

There is another subsidiary which is reasonably sized, HDFC ERGO. This is the general insurance arm of HDFC Group and could likely be listed in the market after 3-5 years.

Financials & Valuation:

2021 2020 2019 2018 2017 2016
Interest Income 42771.96 42647.12 39240.24 33133.08 32111.06 29257.31
Investment Profits 2351.97 12677.9 1830.85 5718.25 1001.73 1647.81
Other Revenue Sources 3051.93 3438.32 2306.92 1856.16 46.81 51.45
Total Revenue 48175.86 58763.34 43378.01 40707.49 33159.6 30956.57
Finance Cost 28614.76 31001.36 27837.67 23497.98 20896.2 19374.51
Impairment 2948 5913.1 935 2115 700 715
Employee benefits 914.11 592.92 716.53 1372.09 388.8 349.09
D&A 158.78 147.74 66.53 49.24 55.96 54.28
Establishment expenses 32.52 40.37 107.57 100.02 86.22 84.19
Other expenses 692.6 716.93 595.94 383.52 305.78 271.4
PBT 14815.09 20350.92 13118.77 13189.64 10726.64 10108.1
PAT 12027.3 17769.65 9632.46 10959.34 7442.64 7093.1

The financials look lumpy due to the listing of their HDFC Life, HDFC AMC subsidiaries and Bandhan-GRUH merger over the past few years. And hence P/E ratio across past few years would look lumpy too.

So let’s go with SOTP valuation.

21.1% of HDFC Bank => 1.65 lakh crores
49.97% of HDFC Life => 0.67 lakh crores
52.7% of HDFC AMC => 0.32 lakh crores
Other subsidiaries are very small, but lets assume they make up 0.1 lakh crores together.
So total subsidiaries value is ~2.75 lakh crores.
After discounting by 30% (holding co. discount), it is 0.7 * 2.75 lakh crores ~ 1.9 lakh crores.

Current Market Cap of HDFC Ltd is 4.4 lakh crores.
This implies that the housing finance business is valued at (4.4 - 1.9) lakh crores ~ 2.5 lakh crores.
Standalone PAT is 12000 crores (There are no listings / mergers in FY21).
Standalone Book Equity is 1.1 lakh crores.

Above numbers imply P/E ~ 20.8 & P/B ~ 2.3 on standalone business.
In my opinion, these are reasonably cheap multiples given the opportunity ahead of us.


  1. Change in culture => HDFC’s strength lies in its culture of prudence and risk management. We have to keep our eyes open to check if this is changing. If short-term growth driven by greed takes over the current culture, then we will have to reevaluate our investment thesis
  2. Greedy DSAs => Lenders are susceptible to losing their existing customers to other players who often lure them through lower interest rates or increased loan amounts. As there are no prepayment penalties on floating rate loans, a lender can take over a home loan rather effortlessly. DSAs are happy to play along as it means getting paid a commission twice over on the same borrower’s loan.
  3. Patience => It may take some more time for the growth cycle in HFC business to pick up. So one may have to wait longer than they anticipated and investors should be mentally prepared in this regard.


No holdings, but seriously considering to invest. I’m not a SEBI registered investment advisor. Please consider me a novice and consult your investment advisor before investing / trading in this stock.


Holding company discount needs to be arrived at par with market. Most of the places it is 50% also.

Valuations are not mouth watering…but good. It is just fairly priced. My value for per share is 3000+… I expect a nominal 12% growth rate in the business for 10 years. Nominal I say because it’s median sales growth has been 17%(as per screener). I may be wrong. But that is why I try to find margin of safety. I haven’t, valued HDFC Ergo…It can be a substantial growth driver.

Disc- Closely monitoring.

1 Like

Thank You @lingalarahul7. I have noted down few points from Annual Report and Presentations:

Improved Affordability:
Annual Household Income Increased far more than Increase in Property Prices.
Rising disposable incomes and lowest ever interest rates on home loans.

Low penetration → Room for growth
Mortgages as a percentage of GDP is still lower compared to other countries.

Govt. Incentives: Tax incentive on Housing loans. Incentives for developers to build affordable housing. HDFC has the highest number of beneficiaries of Credit Linked Subsidy Scheme (CLSS)

Favourable Demographics: 66% of India’s population is below 35 years of age. Rise in the number of Nuclear family Households.

Urbanisation: Currently 32% of the Indian population reside in cities; estimated to be 50% by 2030.

Lower Risk → 77% of Lending to Individuals of which 78% to Salaried Class. Pan India Presence. More than 80% of loans sourced In-house (54% HDFC Sales Pvt Ltd, 27% HDFC Bank)

1 Like

RBI panel has recommended NOFHC as a preferred structure for financial companies promoting other businesses.

Panel recommended moving all banks to that structure eventually with RBI requiring this structure and government allowing tax efficient restructuring.

Currently NOFHC is not followed by HDFC, ICICI, Axis, KMB whereas this is required for new banks creating unequal regulatory requirements.

If and when such structure is allowed, it could open up great possibilities for HDFC including reduction in the holdco discount or merger with HDFC bank


Attaching HDFC Securities portal snapshot.
I am an account holder here and such is the level of mediocrity and negligience at this organisation , that they are serving their customers with such cheap UI experience.
I have tried this portal on chrome, IE, safari and mozilla.
How can such a well known organization be so careless. If you notice , their column headings are breaking the UI experience and the last headings Process and Eligibility are just lying anywhere.

Is it customer’s responsibility to match the column values with the column table headings to see his details.

Disc: Invested


Valuations aren’t good. They would be said to be high.

As for benefiting from inflation - inflation is bad for lenders. Interest rates go higher (thereby depressing demand for loan) + your interest margin from earlier loans go lower.

Another matter is the pandemic. This has dampened the real estate market in metros. If 100 people were gonna buy a housing unit in metros, and part of them (say 30) choose to build it in a small town, thats less demand for loan as housing would be cheaper in smallter towns.

If some of those 30s choose to live with their parents in said small towns rather than buy housing, then there is no demand. That’s why real estate companies are suffering and propping up their share prices by manupulating so that big money can offload those.

I dont’ see any value investing in Real estate builders or financiers in near and medium term.


HDFC Securities is subsidiary of HDFC bank and not HDFC Ltd.

Couple of other growth drivers in HDFC Ltd

  1. Property funds and Investment management: Make opportunistic bets with likes of Brookefield and manage real-estate funds for global investors. This is still small compared to developed world and likely to see multi-fold growth.
  2. Education loans (Credelia): This can be really big looking at ballooning cost of higher education. They also also toying with schools. Have 2-3 schools. At very nascent stage but Credelia is growing fast. Already crossed 150 cr in profits this year.
1 Like

If you are comparing with 2013-14 kind of valuations, yes, they are high. But in the current environment where consumer and chemical companies are trading at skyrocket valuations, this is a good bargain.

Interest rates are hiked after inflation effects are felt by the mass population. Before rates are hiked so much that it curbs housing demand, real estate would have already run up a lot by then. Also despite high interest rates in the 1970s US, there was no dearth of demand for US real estate back then.

Agreed that real estate demand could diversify into smaller towns. It can also mean that more people are opting for home loan as it improves affordability. You and I can keep arguing subjectively that diversification into smaller towns will affect the housing loan demand positively vs negatively, but numbers of HFCs show that AUMs are growing fast.

Discl: Forms 10% of portfolio. Entered in last 30 days. Please do your own due diligence before investing.


HDFC Integrated report.
It’s voluntary for the company to prepare.

It says…
Our Integrated Report is a simple narrative of what we do at HDFC each day at work. It
gives us an opportunity to look beyond the realm of financial parameters, introspect
and enables us to think about a better future ahead.

I like hence sharing it.

Integrated Report HDFC August 2021.pdf (6.3 MB)


hey @lingalarahul7 great analysis. As others have said it is not cheap but i think it is a great buy at the CMP.
The way i look at it is, it has investments in HDFC bank worth ~2 lakh crores, to this there in no point in applying a discount as there will never sell those share and they pass on all the dividends received

The non lending businesses are hdfc life + amc ~ 1 lakh crores, and ergo ~20 lakh crores (according to the last fund raising), to this a 15-25% discount is valid as they can possibly sell these share at some point and will have to pay 25% tax but until they do we get all the dividends and compounding. so this is ~1 lakh crores

From the CMC of 4.5 lakh crores if we remove 2 lakh crores(bank) + 1lakh crores (non lenders) then the core business is 1.5 lakh crores with capital of 1 lakh crores and profits of 12000cr a year

The entire corporation is a compounding machine, and with a bad year for all the group companies (but earning momentum in place) i think it is a good option. Divident yield is close to 1%

Financials apart, you dont really have to worry about the promotor stealing money from the company or withholding dividends or empire building.

After making a lot of money and a lot of anxiety from small and midcaps and cyclicals over the last two years i think capital preservation in a reliable steady slow boring compounder is a good option


Also on the point of inflation. I dont think land prices going up or down will have a material impact on the loan growth of HDFC. There is a massive market and HDFC will keep growing steadily.

High inflation leading to high interest rates would be good for banks like kotak, icici, sbi and axis that have a large repo linked home loan portfolio. That portion will be repriced immediately and the customer would not feel it that much if they are availing tax benefits.

1 Like

One key point we tend to miss out while looking at HDFC is its impeccable record as venture capitalist. How do one ascribe value to the same?

Created one of largest private sector bank, life insurance company, general insurance and AMC companies. Created a successful BPO (Intelenet) and sold. Acquired Gruh, scaled up and sold. Acquired Education loan company and in process of scaling up. I am not even counting asset management it does for a number of funds in reality and related biz for a fee.

This news augurs very well for core mortgage biz as well

1 Like

Apart from constant FII selling could there be any other reason for this constant fall in HDFC?
I am buying more at lower levels but somewhere at the back of my mind i get the feeling of “am i missing something”?
Current hdfc bank is at a earnings yeild of 5%, hdfc life is almost at 3x EV which is reasonably priced, amc is still a little pricy but not very, ergo at 40k mcap according to the last transaction is cheap.

At the Mcap of 4lakh crores
investments in
hdfc bank is ~1.6lakh crores
life + amc ~ 75k crores
ergo ~ 20k crores
bandhan+yes+others ~ 10k crores

so core housing business is ~ 1.35 lakh crores or 11 PE
overall dividend yield of 1% on depressed earnings of subsidiaries

But surely a deal this good would have to have some string attached somewhere. Any thoughts?


Probably same was case with Infosys couple of years back when Vishal Sikka quit. Adjusted for cash core biz was at similar valuation. Has been 4x in 5 years after that.


In fact as per December share holding pattern fii only increased holding little bit they haven’t sold anything.

I am wondering the same. The stock seems fairly priced right now. But I guess thats how the markets move in mass.

Discl: Actively tracking

i think the fall is more due to FII selling.we have to watch 31/3/2022 share holdings.
Adding at lower levels@2200.

1 Like

In my opinion, HDFC’s valuation presently is close to cyclical historic lows from a valuation and technical standpoint. It has not consistently traded below its 200 week simple moving average for more than a few weeks in the past 15 years, and that’s where it is presently. I follow the Occam’s razor and put this down to FII selling alone, not speculating about whether I’m mission something. At the end of the day, FIIs need to sell what they own when the dollar strengthens so much and there is so much uncertainty - they own A LOT of HDFC.

Have written about this on my portfolio thread which I have linked here.

I have a high returns threshold and have an aggressive small and midcap focused portfolio, but at present valuations HDFC fits my criteria of potential 20% CAGR over a three year period. Took a small position yesterday (1.5% of PF), and looking to add aggressively on further dips.

Not a financial advisor. Not a recommendation.