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HDFC Bank: Eyeing growth

Jan 10, 2002

HDFC Bank maintained its stellar financial performance in the first half of the current fiscal. The bank’s profits and interest income recorded a rise of over 40%. Its interest margins however, witnessed a steep decline. HDFC Bank is expected to declare its third quarter results early next week. We expect the bank to maintain strong growth rates in both topline and profits. Although, the bank’s operating margins are expected to decline, higher growth in profits will be fueled by over 80% rise in other income.

Its new initiatives in the current quarter includes launch of credit card in Chennai. The bank in a tie up with Visa introduced its credit card product, which will be accepted at 110,000 merchant establishments in India and over 18 m outlets around the world. South India has the largest credit card holders in the country. Depending on the success of the card in Chennai, it would extend the card business to other major centres. The bank is also planning to launch a MasterCard in the near future. The credit card business in India is expected to grow at the rate of 30% in the next two years. HDFC Bank will initially leverage its existing customer base of 1.75 m for marketing of credit card. Even though it is a highly competitive market, strong growth rates of the segment and low penetration are likely to offer growth opportunity to the bank.

Financial snapshot
(Rs m) 3QFY00 3QFY01 Change 3QFY02E Change
Interest Income 1,600 3,257 103.5% 4,495 38.0%
Other Income 348 471 35.2% 847 80.0%
Interest Expenses 910 1,980 117.6% 2,921 47.6%
Operating Profit 690 1,277 85.0% 1,573 23.2%
Other Expenses 568 951 67.4% 1,258 32.3%
Profits Before Tax 471 797 69.3% 1,162 45.8%
Tax 189 259 37.2% 383 48.0%
Net Profits 282 538 90.8% 778 44.8%
Equity shares (m) 200.0 243.3   281.2  

Key ratios
Particulars 3QFY00 3QFY01 3QFY02E
OPM 7.7% 10.0% 7.0%
Cost to income ratio 54.7% 54.4% 52.0%
Tax / PBT 40.1% 32.5% 33.0%
NPM 17.6% 16.5% 17.3%
EPS (Rs) 4.0 7.6 11.1

HDFC Bank will also enter commercial automobile financing sector in Jan 2002, offering loans for purchase of heavy and light commercial vehicles. It will target fleet operators, leveraging its association with vehicle manufacturers. Low cost funds advantage will provide the edge to the bank in this segment, which will help it gain market share from non-banking financial companies in the sector.

The bank has entered into a 50:50 joint venture with iFlex Solutions to offer the old private banks, regional banks and co-operative banks the ‘ASP’ model as a low cost alternative for setting up their own infrastructure. The JV has been floated with an initial investment of Rs 60 m. The solution to be provided by the bank includes ‘Flexcube’ on pay by usage basis, management of data centres and total implementation on a turnkey basis. This financial solution will facilitate 'anywhere banking' with interface to internet/telephone/mobile banking for these banks.

The bank plans to increase its reach and will also introduce its entire range of products across all areas it operates and improve its distribution channels. Currently, the bank has a network of 134 branches and 310 ATMs, which it aims to expand to 154 branches by March 2002. The recent initiatives taken by the bank are expected to support its revenues growth in future.

At the current market price of Rs 225 HDFC Bank is trading at a P/E of 19x and Price/Book value ratio of 3x FY02 projected earnings. Going forward, the bank’s premium valuations compared to other private sector banks depend on its ability to maintain strong growth rate in earnings (from FY03 onwards). However, competitive pressure coupled with declining interest rates could lower its earnings growth rates in the next two years and the stock could see correction in its current high valuations.

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