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HDFC: Lower provisions boost profits

Jan 22, 2014 | Updated on Oct 30, 2019

HDFC declared its results for the third quarter of the financial year 2013-14 (3QFY14). The institution has reported a 15.8% YoY growth in net interest income while net profits have grown at 12.1% YoY during 3QFY14. The profits for 9mFY14 grew 12.9% YoY. Here is our analysis of the results.

Performance summary
  • The net interest income grows by 15.8% YoY in 3QFY14 owing to 21% YoY growth in total loan book. 89% of the incremental growth in loan book came on the back of individual loans during 9MFY14.
  • Net interest margin falls from 4.2% in 3QFY13 to 4.0% in 3QFY14.
  • Other income dropped for third quarter in a row by 18.1% YoY in 3QFY14
  • Net profit grows by 12.1% YoY for 3QFY14 underpinned by healthy net interest income and lower provisions for the quarter.
  • Capital adequacy ratio and gross NPAs stand at 19% and 0.8% respectively at the end of December 2013.
  • The company reported a healthy RoE of 21.1% during the quarter.

Standalone financials
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Interest income 51,005 59,089 15.8% 148,365 169,374 14.2%
Interest Expense 35,215 40,798 15.9% 104,511 118,888 13.8%
Net Interest Income 15,791 18,291 15.8% 43,855 50,486 15.1%
Net interest margin       4.2% 4.0%  
Other Income 1,499 1,221 -18.6% 6,334 6,125 -3.3%
Other Expense 1,439 1,684 17.1% 4,257 5,039 18.4%
Provisions and contingencies 400 250 -37.5% 1,200 700 -41.7%
Profit before tax 15,451 17,577 13.8% 44,731 50,871 13.7%
Tax 4,050 4,800 18.5% 11,800 13,700 16.1%
Effective tax rate 26.2% 27.3%   26.4% 26.9% 117.3%
Profit after tax/ (loss) 11,401 12,777 12.1% 32,931 37,171 12.9%
Net profit margin (%) 22.4% 21.6%   22.2% 21.9%  
No. of shares (m)         1559.25  
Book value per share (Rs)*         186  
P/BV (x)         4.5  
* (Standalone book value as on 31st December 2013)

What has driven performance in 3QFY14?
  • Despite slowdown in loan growth since past few quarters, the asset quality and spreads for HDFC Ltd have remained intact. Therefore, the earnings stood benign and the business growth firm.

  • Also, going with the trend, the individual loan book has been improving steadily and accounted for 68% of the total loan book. Leveraging the wide branch network of HDFC and HDFC Bank, the company has been focusing on small cities and this has translated into a healthy revenue growth for the company. The loan book of the company grew by 21% YoY. However, the corporate loan book has grown at a smaller pace and may not pick-up soon.

  • The net interest income for the company grew 15.8% YoY on the back of healthy loan growth and expansion in spreads. The margins, however, were tad down to 4.0% during 3QFY14 from 4.2% a year ago.

  • The other income growth disappointed on account of lower gains on sale of investments during the quarter. The non-interest in come was seen down by 18.6% YoY during 3QFY14.

  • The operating costs stood on the higher side and spiked by 17% YoY during 3QFY14. The cost-income ratio moved tap up to 8.6% during 3QFY14 from 8.3% in 3QFY13.

  • The asset quality for HDFC Ltd stood stable and sequentially the NPAs reduced to 0.77% during 3QFY14 from 0.79% the previous quarter. The gross NPAs from the individual portfolio stood at 0.57% while that of the non-individual portfolio stood at 1.18%. The provisions for the quarter stood lower and were seen down by 37.5% YoY.

  • Lower provisions and stable interest income stream boosted the profitability of the company. The profits grew 12.1% YoY during 3QFY14.

  • The capital adequacy for HDFC Ltd stood at 19.1% as at the end of December quarter. Therefore, the company stands well-capitalized to sustain growth going forward.
What to expect?
At the current price of Rs 839, the stock of HDFC is trading at 4.5 times standalone adjusted book value.

The December quarter performance remained stable for HDFC despite a challenging environment. The revenues grew by 16% YoY on the back of growth in individual loan portfolio. Bottom-line grew 12% YoY restricted by lower gains in investment portfolio.

Defying the macro challenges and the intense competition, HDFC Ltds balance sheet has stood resilient. Both margins and asset quality have sustained the testing times and the trend is expected to continue. With focus on smaller cities, HDFC Ltd is penetrating into semi-urban markets to boost its loan portfolio growth.

Therefore, at current valuations, we recommend investors to BUY the stock. However please ensure that no stock forms more than 3-5% of your portfolio.

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