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HDFC: Losing pricing power
Jan 14, 2011

HDFC declared its 3QFY11 results. The institution has reported a 16% YoY growth in interest income while net profits have grown by 33% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Interest income grows 7% YoY in 9mFY11 on the back of 22% YoY growth in advances.
  • Net interest margin falls by 0.5% to 3.8% in 9mFY11 from 4.3% in 9mFY10.
  • Other income increases by 34% YoY in 9mFY11 on the back of gains booked on sale of investments.
  • Net profit grows by 26% YoY for 9mFY11 mainly due an increase in other income. For 3QFY11, profits grew by 33% YoY due to other income doubling and a marginal increase in tax.
  • Capital adequacy and gross NPAs stand at 14.1% and 0.5% respectively at the end of 3QFY11.


Standalone numbers
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Interest income 27,056 31,490 16.4% 82,820 88,526 6.9%
Interest Expense 17,042 19,928 16.9% 55,035 54,300 -1.3%
Net Interest Income 10,013 11,561 15.5% 27,785 34,227 23.2%
Net interest margin       4.3% 3.8%  
Other Income 566 1,721 203.8% 1,795 2,406 34.0%
Other Expense 962 1,098 14.1% 2,949 3,363 14.0%
Provisions and contingencies 45 56 23.6% 129 140 8.1%
Profit before tax 9,573 12,129 26.7% 26,501 33,130 25.0%
Tax 2,860 3,220 12.6% 7,500 9,200 22.7%
Effective tax rate 29.9% 26.5%   28.3% 27.8%  
Profit after tax/ (loss) 6,713 8,909 32.7% 19,001 23,930 25.9%
Net profit margin (%) 24.8% 28.3%   22.9% 27.0%  
No. of shares (m)       1,424.5 1464.4  
Book value per share (Rs)*         121.6  
P/BV (x)         5.3  
* (Standalone book value as on 31st December 2010)

What has driven performance in 9mFY11?
  • HDFC's loan book grew at a strong pace (up 22% YoY) in 9mFY11. Inclusive of loans sold (securitized), the growth clocked was 27% YoY. While approvals grew by 29% YoY the disbursals grew by 25% YoY, compared to the same period last year. The individual portfolio was a growth driver with approvals growing at 39% and disbursements at 38%. However, new NHB (National Housing Board) norms have clamped down on the 'dual-rate' scheme that HDFC used to offer. Provisioning for these loans was increased 5 times to 2% of the outstanding loans. This was a huge growth engine for the company in its individual portfolio. Now, with the scheme ceasing to exist (ended in Dec 2010) and with a rising interest rate cycle, growth in this business may see some slowdown in the next few quarters.

  • Despite decent loan growth, the company saw only a 7% increase in interest income during 9mFY11. The quarterly performance was better with the company seeing a 16% YoY increase in interest income in 3QFY11. However, the dismal 9 month performance on this front shows that the institution is losing pricing power to some extent with rampant competition in the space. However, with banks facing rising NPA concerns on their home loan portfolios, this may turn in HDFCs favour. The net interest margin (NIM) fell by 0.5% to 3.8% in 9mFY11. We have been more conservative, estimating a 3.5% NIM for FY11.

    Loan book break up...
    (Rs m) 9mFY10  9mFY11 Change
    Loans      
    Individuals 657,933  817,807 24.3%
    % of total 66.5% 67.8%  
    Corporate Bodies 315,863  373,318 18.2%
    % of total 31.9% 30.9%  
    Others   15,489     15,701 1.4%
    % of total 1.6% 1.3%  
    Total loans 989,284       1,206,825 22.0%

  • HDFC's other income fell by 34% in 9mFY11. Due to a sale of a 10% stake in the unlisted IL&FS, other income doubled for the 3QFY11.

  • HDFC's gross NPAs (loans outstanding for more than 90 days) aggregated to 0.85% of the loan portfolio in 9mFY11 (0.94% 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 14.1%, 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 2010, the unrealised gains on HDFC's listed investments amounted to Rs 148 per share as against Rs 99.6 per share at the end of December 2009.

  • Net profits increased by 26% in 9mFY11 due to a fall in interest expense and an increase in other income. In 3QFY11, net profits grew by 33%. This was mainly due to a 200% increase in other income due to sale of investments. If not for this, profit growth would have been muted.

What to expect?
At the current price of Rs 652.6, the stock is trading at 3.7 times our estimated FY13 consolidated adjusted book value. Research Pro subscribers can view our latest update on the company.

In light of the increased NHB provisioning norms on HDFC’s 'dual rate' loans, Rs 2.7 bn was used from its reserves. In the current rising interest rate scenario and on a higher base of individual home loans, growth for HDFC is unlikely to come in at a sharp clip. Margins are also expected to be subject to pricing pressures. Due to the above reasons, we maintain a negative view on the stock at current levels.

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