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HDFC: Interest costs continue to pinch - Views on News from Equitymaster
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HDFC: Interest costs continue to pinch
Jan 12, 2012

HDFC Ltd. declared its results for the third quarter of the financial year 2011-12 (3QFY12) results. The institution has reported a 39% YoY growth in interest income while net profits have grown by 10% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Interest income grows 39% YoY in 9mFY12 on the back of 21% YoY growth in advances.
  • Net interest margin falls by 0.1% to 4.3% in 9mFY12 from 4.4% in 9mFY11.
  • Other income falls by 14% YoY in 9mFY12 on the back of lower gains booked on sale of investments.
  • Net profit grows by 17% YoY for 9mFY12 which was in line with the increase in net interest income. For 3QFY12, profits grew by 10% YoY on lower other income and higher costs of funds.
  • Capital adequacy and gross NPAs stand at 13.9% and 0.8% respectively at the end of 3QFY12.

Standalone numbers
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Interest income  31,490 43,793 39.1% 88,526 122,571 38.5%
Interest Expense 19,928 30,124 51.2% 54,300 82,179 51.3%
Net Interest Income 11,561 13,669 18.2% 34,227 40,392 18.0%
Net interest margin       4.4% 4.3%  
Other Income 1,721 932 -45.9% 2,406 2,062 -14.3%
Other Expense 1,098 1,265 15.2% 3,363 3,893 15.8%
Provisions and contingencies 56 54 -3.1% 140 147 5.0%
Profit before tax 12,129 13,283 9.5% 33,130 38,415 16.0%
Tax 3,220 3,470 7.8% 9,200 10,450 13.6%
Effective tax rate 26.5% 26.1%   27.8% 27.2%  
Profit after tax/ (loss) 8,909 9,813 10.1% 23,930 27,965 16.9%
Net profit margin (%) 28.3% 22.4%   27.0% 22.8%  
No. of shares (m)         1472.2  
Book value per share (Rs)*         132.6  
P/BV (x)         5.2  
* (Standalone book value as on 31st December 2011)

What has driven performance in 9mFY12
  • HDFC's loan book grew at a strong pace (up 21% YoY) in 9mFY12. Inclusive of loans sold (securitized), the growth clocked was 25% YoY. Approvals and disbursements both grew by 19% YoY, compared to the same period last year.

  • The institution saw a 39% YoY increase in interest income and a 18% growth in net interest income during 9mFY12. The quarterly performance saw a similar robustness. HDFC was able to maintain its margins even in a difficult environment as its net interest margin (NIM) fell marginally to 4.3% compared to 4.4% in 9mFY11.

    Loan book break up...
    (Rs m) 9mFY11 9mFY12 Change
    Loans
    Individuals 704,714 842,999 19.6%
    % of total 64.6% 63.8%  
    Corporate Bodies 370,098 461,609 24.7%
    % of total 33.9% 34.9%  
    Others 15,701 17,472 11.3%
    % of total 1.4% 1.3%  
    Total loans 1,090,512 1,322,079 21.2%

  • HDFC's other income fell by 14% in 9mFY12. However on a three month basis, other income was down 46% in 3QFY12. This is because the financier had sold a 10% stake in the unlisted IL&FS in the corresponding quarter last year. This year it was unable to monetize similar gains.

  • HDFC's gross NPAs (loans outstanding for more than 90 days) aggregated to 0.82% of the loan portfolio in 9mFY12 (0.85% previously). The balance in the provision for contingencies account is around 1% of the overall loan portfolio.

  • HDFC's capital adequacy ratio (CAR) stood at 13.9%, as against the minimum requirement of 12%, ensuring sufficient capital to grow in the medium term without any equity dilution.

  • At the end of December 2011, the unrealised gains on HDFC's listed investments amounted to Rs 130 per share as against Rs 147 per share at the end of December 2010 on account of the dismal performance of equity markets over the past twelve months.

  • Net profits increased by 17% in 9mFY12 despite increased costs of funds and a fall in other income. In 3QFY12, net profits grew by 10%. This was mainly due to a fall in other income.

What to expect?
At the current price of Rs 688, the stock is trading at 3.6 times our estimated FY14 consolidated adjusted book value. In the current interest rate scenario and on a higher base of individual home loans, growth for HDFC is unlikely to come in at a sharp clip going forward. HDFC was able to maintain its margins at 4.3% in the first 9 months, but can still see some pressure on its net interest income (NII) on higher costs of funds. However, with the RBI expected to cut rates over the next few months, HDFC should soon be able to capitalize on the same. We maintain our negative view on the stock at current levels on account of expensive valuations.

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