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HDFC: Other income supports profits - Views on News from Equitymaster
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HDFC: Other income supports profits
Feb 11, 2015

HDFC declared its results for the third quarter (3QFY15) and first nine months of the financial year (9mFY15). The institution has reported 15.1% YoY growth in net interest income while net profits have grown by modest 11% YoY during 9mFY15. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 15.1% YoY in 9mFY15 on the back of 14.4% loan book expansion. The individual loan book reports 17.4% YoY growth and total loan book reports 14.4% YoY growth.
  • Net interest margin remain stable at 3.9% for 9mFY15.
  • Other income increases by staggering 86.8% YoY on the back of superior investment gains.
  • Net profit remains restricted to 11% YoY for 9mFY15 on account of higher provisions.
  • Capital adequacy and gross NPAs stand at 19.7% and 0.7% respectively at the end of December 2014.

Standalone financial performance snapshot
(Rs m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Interest income  59,851 67,584 12.9% 174,013 197,369 13.4%
Interest Expense 40,798 45,877 12.4% 118,887 133,921 12.6%
Net Interest Income 19,053 21,707 13.9% 55,126 63,448 15.1%
Net interest margins       4.0% 3.9%  
Other Income 457 1,242 171.5% 1,485 2,775 86.8%
Other Expense 1,684 1,853 10.0% 5,040 5,366 6.5%
Provisions and contingencies 250 450 80.0% 700 1,150 64.3%
Profit before tax 17,576 20,646 17.5% 50,871 59,707 17.4%
Tax 4,800 5,517 14.9% 13,700 15,980 16.6%
Effective tax rate 27.3% 26.7%   26.9% 26.8%  
Deferred Tax Liability - 873.0   0.0% 2,450.0  
Profit after tax/ (loss) 12,776 14,256 11.6% 37,171 41,277 11.0%
Net profit margin (%) 21.3% 21.1%   21.4% 20.9%  
No. of shares (m)         1,572  
Book value per share (Rs)*          204.1  
P/BV (x)          6.2  
* (Standalone book value as on 31st December 2014)

What has driven performance in 9mFY15?
  • Good growth in individual loans, stable margins and improved asset quality helped HDFC report reasonable profit growth for 9mFY15. On account of growing demand for loans for home buying by individuals, HDFC's loan book reported a healthy growth. While the demand for retail loans has remained strong, 81% of the incremental growth in loan book during the nine months has come from individual loan portfolio. The institution reported healthy 14.4% YoY growth in total loan book. Overall, the individual loans comprise 72% of the total loan book.

  • The profits for the nine months have grown by 11% YoY purely on the back of higher non-interest income. Provisions for the quarter have increasingly gone up restricting the earnings growth, but asset quality remains stable for HDFC.

    Loan book break up...
    (Rs m) 9mFY14 9mFY15 Change
    Loans
    Individuals 1,348,478 1,583,647 17.4%
    % of total 70.1% 72.0%  
    Corporate Bodies 538,395 571,873 6.2%
    % of total 28.0% 26.0%  
    Others 35,967 43,990 22.3%
    % of total 1.9% 2.0%  
    Total loans 1,922,840 2,199,510 14.4%

  • HDFC's distribution network spans 370 outlets, which include 97 offices of HDFC's distribution company, HDFC Sales Private Limited (HSPL). The operating costs have remained subtle during the nine months. The cost-income ratio at 8% has remained benign and stands as one of the lowest in the industry.

  • The individual portfolio has reported 0.53% as GNPAs; while the non-individual portfolio stood at 1.02%. Nonetheless, the asset quality of HDFC Ltd continues to be one of the best in the industry.
What to expect?
At the current price of Rs 1249, the stock is trading at 4.9 times our estimated FY17 adjusted book value.

The higher provisions during the first half of FY15 dented the profits for HDFC Ltd. That said, we are particularly enthused with the stability in asset quality and spreads despite the testing times. Led by strong demand from the retail customers, HDFC's loan book is poised to grow. We expect the business growth to remains strong and margins stable for the company going forward.

HDFC Ltd has moved up steadily and the stock has witnessed significant momentum. Since in valuations terms the upside is very limited from current levels, we reiterate HOLD rating for the stock and reckon it as a good long-term bet given the resilient balance sheet, sustained margins and impeccable asset quality. However, investors should not buy more of the stock at current levels.

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