Macquarie downgrades HDFC to 'underperform'

Macquarie Capital Securities India has downgraded HDFC to 'underperform' (from outperform), citing that the mortgage lender has been adopting aggressive accounting practices for the past two years.

The research firm also cut HDFC's target price by 30 per cent to Rs550, inviting an immediate backlash from the housing finance company, which charged the the brokerage firm of not attempting to "verify the facts and statements".

''We believe a structural de-rating is likely because the quality of earnings and ROE (return on equity) reported is being driven more by its corporate book and aggressive accounting practices,'' Macquarie analysts Suresh Ganapathy and Parag Jariwala wrote in the report The last bastion falls.

The report said that earnings of the two previous years - FY11 and FY12 – were overstated by 38 per cent and 24 per cent, respectively, and reported return on equity would have been 600 and 400 basis points lower at 16 per cent and 18 per cent respectively if the adjustments had been made through the profit and loss statement.

HDFC reported a net profit of Rs4,122.62 crore in FY12, up from Rs3,534.96 crore in FY11.

Generally, finance companies' report non-performing loans in the profit and loss account, which results in lower profits.