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HDFC: Competition eats into growth - Views on News from Equitymaster

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HDFC: Competition eats into growth
Jan 20, 2010

Performance summary
  • Interest income grows 3% YoY in 9mFY10 on the back of 9% YoY growth in advances
  • Net interest margin improves to 3.6% in 9mFY10, from 3.5% in 9mFY09.
  • Cash surpluses and profit on sale of investments help the growth in other income.
  • Net profit grows by 23% YoY due to lower provisioning and controlled operating expenses.
  • Capital adequacy and net NPAs stand at 14.8% and 0.2% respectively at the end of 9mFY10.

(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Interest income 26,276 24,349 -7.3% 71,589 74,045 3.4%
Interest Expense 20,427 17,042 -16.6% 53,683 55,035 2.5%
Net Interest Income 5,849 7,307 24.9% 17,906 19,010 6.2%
Net interest margin       3.5% 3.6%  
Other Income 2,972 3,272 10.1% 7,051 10,569 49.9%
Other Expense 960 962 0.2% 2,918 2,950 1.1%
Provisions and contingencies 45 45 0.0% 125 129 3.2%
Profit before tax 7,816 9,572 22.5% 21,914 26,500 20.9%
Tax 2,347 2,860 21.9% 6,423 7,500 16.8%
Effective tax rate 30.0% 29.9%   29.3% 28.3%  
Profit after tax/ (loss) 5,469 6,712 22.7% 15,491 19,000 22.7%
Net profit margin (%) 20.8% 27.6%   21.6% 25.7%  
No. of shares (m)       284.5 285.9  
Book value per share (Rs)*         538.0  
P/BV (x)         4.7  
* (Standalone book value as on 31st December 2009)

What has driven performance in 9mFY10?
  • While an initial reckoning of HDFC’s results give the impression that competition from banks has dealt a heavy blow on the institution’s 3QFY10 and 9mFY10 performance, a closer look assures retained profitability. Despite the relaxed interest rates on home loans during the past 9 months, the same failed to show any substantial impact on HDFC’s loan book as the same grew at a muted pace (up 9% YoY) in 9mFY10. Meanwhile the approvals have grown by 25% YoY and the disbursals grew by 26% YoY. Having said that HDFC remains unscathed from the asset slippage woes that lenders across the world are bearing the brunt of.

    Loan book break up…
    (Rs m) 9mFY09 9mFY10 Change
    Approvals 2,221,040 2,785,600 25.4%
    Disbursements 1,793,670 2,253,330 25.6%
    D/A ratio 81% 81%  
    Loans      
    Individuals 558,986 575,548 3.0%
    % of total 66.9% 67.3%  
    Corporate Bodies 250,350 313,063 25.1%
    % of total 30.8% 30.3%  
    Others 19,620 15,488 -21.1%
    % of total 2.3% 2.4%  
    Total loans 828,956 904,099 9.1%

  • HDFC’s other income grew by 50% YoY in 9mFY10 due to the income from sale of investments. The same may, however, not be sustainable going forward.

  • HDFC’s gross NPAs (loans outstanding for more than 90 days) aggregated to 0.94% of the loan portfolio in 9mFY10 as against 1.01% in the corresponding period of the previous year. The balance in the provision for contingencies account was is 1.9 times the regulatory requirement as stipulated by the National Housing Bank.

  • HDFC’s capital adequacy ratio (CAR) stood at 14.8%, as against the minimum requirement of 12%, ensuring sufficient capital to grow in the medium term without equity dilution.

  • At the end of December 2009 the unrealised gains on HDFC’s listed investments amounted to Rs 496 per share as against Rs 240 per share at the end of December 2008.

What to expect?
At the current price of Rs 2,526, the stock is trading at 3.4 times our estimated FY12 consolidated adjusted book value. Although HDFC’s loan growth so far in FY10 has been lower than our estimates, the institution is well on track to achieve our profit estimates. HDFC’s unique business model (sales through direct selling agents and arrangement with HDFC Bank) will enable it to sustain a low cost to income ratio and enjoy operating leverage. The management has indicated that the timely re-pricing of loans will ensure that its spreads are protected. We maintain our positive view on the stock.

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