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HDFC: Difficult quarter - Views on News from Equitymaster
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HDFC: Difficult quarter
Jan 21, 2009

Performance summary
  • Interest income grows 36% YoY in 9mFY09 on the back of 24% YoY growth in advances
  • Net interest margin drops to 3.6% in 9mFY09, from 3.8% in 9mFY08.
  • Lower returns on investments lead to fall in other income despite nearly 50% growth in processing fees. Unrealised gains on investments fall by 50% YoY.
  • Net profit (excluding extraordinary item) grows by 26% YoY in 9mFY09. The growth, however, is mere 3.6% in 3QFY09.
  • Net NPA levels remain at 1.0% in 9mFY08 against 1.1% in 9mFY08.

(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Interest income 19,815 28,279 42.7% 55,437 75,512 36.2%
Interest Expense 13,159 20,427 55.2% 37,830 53,683 41.9%
Net Interest Income 6,656 7,852 18.0% 17,607 21,829 24.0%
Net interest margin       3.8% 3.6%  
Other Income 1,732 969 -44.1% 3,320 3,127 -5.8%
Other Expense 741 960 29.6% 2,330 2,918 25.2%
Provisions and contingencies 44 45 2.3% 121 125 3.3%
Profit before tax 7,603 7,816 2.8% 18,476 21,913 18.6%
Tax 2,322 2,347 1.1% 6,137 6,422 4.6%
Effective tax rate 30.5% 30.0%   33.2% 29.3%  
Profit after tax/ (loss) 5,281 5,469 3.6% 12,339 15,491 25.5%
Extraordinary items 1,209 -   4,342 -  
Net Profit after tax/ (loss) 6,490 5,469 -15.7% 16,681 15,491 -7.1%
Net profit margin (%) 26.7% 19.3%   22.3% 20.5%  
No. of shares (m)       281.5 284.4  
Book value per share (Rs)*         474.7  
P/BV (x)         2.9  
* (Standalone book value as on 31st December 2008)

What has driven performance in 3QFY09?
  • Its inability to compete with banks in terms of borrowing costs and pass on the same to its customers impacted the performance of HDFC in the most recent quarter. However, a look at the nine month performance shows that the institution has been reasonably healthy in terms of growth and profitability. In the past 9 months, HDFC’s loan book grew by 24%, while the approvals have grown by 15% YoY. A bulk of the loans continues to be lent to retail borrowers, particularly with ticket size below Rs 3 m.

    Loan book break up…
    (Rs m) 1HFY08 1HFY09 Change
    Approvals 293,760 338,200 15.1%
    Disbursements 222,850 272,110 22.1%
    D/A ratio 76% 80%  
    Individuals 446,259 558,986 25.3%
    % of total 66.9% 67.3%  
    Corporate Bodies 206,596 250,350 21.2%
    % of total 30.8% 30.3%  
    Others 16,903 19,620 16.1%
    % of total 2.3% 2.4%  
    Total loans 669,758 828,956 23.8%

  • HDFC’s other operating income dropped by 6% YoY in 9mFY09 due to the fall in surplus cash deployed with the mutual funds. The institution, nevertheless managed a healthy growth in its processing fee income.

  • In 9mFY08, the exceptional income related to profit on sale of investment of the entire shareholding in Intelenet Global Services, which was earlier an associate company of HDFC.

  • HDFC’s gross NPAs (loans outstanding for more than 90 days) aggregated to 1.0% of the loan portfolio in 9mFY09 as against 1.1% in the corresponding period of the previous year. The balance in the provision for contingencies account was 1.9 times the regulatory requirement as stipulated by the National Housing Bank.

  • HDFC’s capital adequacy ratio (CAR) stood at 16% (Tier I – 14.1%), as against the minimum requirement of 12%.

  • At the end of December 2008, the unrealised gains on HDFC’s listed investments amounted to Rs 240 per share as against Rs 502 per share at the end of December 2007.

What to expect?
    At the current price of Rs 1,370, the stock is trading at 2.4 times our estimated FY11 consolidated adjusted book value. 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. While the rate of growth in advances may be moderate in the medium term, we expect the company to regain higher NIMs. The institution faces no risks in terms of capital and quality of assets. We maintain our positive view on the stock.

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