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HDFC: Staving off competition

Jan 7, 2002

HDFC has been reputed for its consistent performance over the past few years. Despite an economic slowdown, the company had maintained over 20% growth in first half earnings on 15% rise in topline. HDFC is expected to declare its third quarter results in the current week. We have attempted to forecast its third quarter performance based on the first half performance and its latest initiatives to reduce interest rates on housing loans to fuel the volume growth. HDFC has also reduced deposit rates by about 150 basis points since the beginning of the year. The company is now passing on the advantage of low cost funds to customers by lowering housing loan interest rates. Housing finance market is expected to grow at about 25-30% in the current year and HDFC being a leader, has already recorded a 29% rise in disbursements.

The company’s income from operations is expected to grow about 18% in 3QFY02. Its operating margins are likely to move up mainly due to lower depreciation and control on operating cost. These positive factors together would inflate its earnings by about 27%.

Financial snapshot
(Rs m) 3QFY00 3QFY01 Change 3QFY02 Change
Income from Operations 5,096 5,797 13.8% 6,841 18.0%
Other Income 7 1 -84.3% 34 3009.4%
Interest Expense 3,690 4,149 12.4% 4,857 17.1%
Net interest income 1,406 1,648 17.2% 1,984 20.3%
Other Expenses 189 242 28.0% 303 25.1%
Depreciation 120 140 16.8% 68 -51.2%
Profits Before Tax 1,104 1,268 14.8% 1,647 29.9%
Tax 153 182 18.6% 264 45.2%
Profits After Tax 951 1,086 14.2% 1,383 27.4%
No. of shares (m) 119.1 119.1   119.1  

Key ratios
Particulars 3QFY00 3QFY01 3QFY02
OPM 21.5% 21.8% 23.6%
Cost to income ratio 21.9% 23.2% 18.4%
Tax / PBT 13.9% 14.3% 16.0%
NPM 18.7% 18.7% 20.2%
EPS (Rs) 31.9 36.5 46.5

HDFC’s ability to maintain financial performance and growth in business is commendable. However, the housing finance market is becoming competitive with the entry of public sector banks (PSBs) and financial institutions. SBI, India’s largest PSB is venturing into the segment aggressively to snatch away market share from HDFC. ICICI also offers competitive rates and quality of service comparable to HDFC. This is likely to impact HDFC’s interest spread in the coming years. Today, SBI and ICICI offer interest rates nearly comparable to HDFC.

At the current market price of Rs 623 HDFC is trading at a P/E of 14x and Price/Book value ratio of 3x FY02 projected earnings. The stock has been accorded premium valuations due to its consistent growth rates in the last few years. Also, increase in FII limit in the company has technically shored up its stock price. Foreign holding in HDFC has already crossed 70%. This is the highest level of foreign participation in any listed entity in the Indian financial sector. While FIIs hold 45%, foreign direct investment is 25%. Consequently, any negative news or even a marginal deterioration in financials could impact its stock price adversely.

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