Maquarie accuses HDFC of inflating earnings, cuts target price by 30%

Maquarie Research has downgraded HDFC to underperform from outperform and has accused the housing major of inflating earnings and return on earnings over the last two years in its latest report.

Slashing the company’s target price by 30 percent to Rs 550, the brokerage said HDFC has been adopting aggressive accounting practices by passing provisioning through reserves and also making the adjustments for zero-coupon bonds (ZCBs).

“We believe FY11 and FY12 earnings are overstated by 38% and 24% respectively and reported ROE would have been 600 and 400 bps lower at 16% and 18% respectively if the adjustments had been made through the P&L,” said Macquire.

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The brokerage further alleged that the quality of earnings reported are being driven more by its corporate book and aggressive accounting practices. Such a practice is generally negative on financials in India. However, the report said that the call on HDFC is structural, not cyclical and is clearly anti-consensus.

The stock closes 1.63 percent lower at Rs 544.40.