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HDFC Bank: Holds its ground

Apr 2, 2001

The Sensex has crashed by more than 8% since the beginning of the year 2001. Across the board selling pressure has led to an erosion of billions of rupees in the market cap. During the period stock prices of defensive sectors have however, remained relatively less volatile. HDFC Bank is a part of this group. Its stock price witnessed a rise of 2.8%. This is remarkable considering the heavy sell off in the markets. HDFC Bank has doubled its operating income and showed a growth of 83% in profits during the first nine months of FY01. Increasing competition has put a pressure on its operating margins, which declined by 46 basis points during the above period. The fall was sharper in the third quarter of FY01 when the margins fell by 390 basis points.

Financial snapshot
(Rs m) 9m FY00 9m FY01 Change
Interest Income 4,239 8,971 111.6%
Other Income 803 1,280 59.4%
Total Income 5,042 10,251 103.3%
Interest Expenses 2,510 5,354 113.3%
Operating Profit 2,532 4,897 93.5%
Other Expenses 1,069 2,261 111.5%
Depreciation 184 413 124.0%
Profit Before Tax 1,279 2,224 73.9%
Tax 464 731 57.7%
Net Profit 815 1,492 83.1%
Equity shares (m) 243 243  

Ratio analysis
Particulars 9m FY00 9m FY01
Operating profit margins 40.8% 40.3%
Tax / PBT 36.3% 32.9%
Net profit margins 16.2% 14.6%
EPS (Rs)* 4.46 8.16
* (annualised)

HDFC Bank derives more than 55% of its operating income from investments in government securities, debentures, bonds and shares. Government securities accounted for 56% of investments, while shares, debentures and bonds formed 37% in FY00. The recent stock market scam is likely to impact the investment income of the bank in the fourth quarter of FY01.

Due to payment default on the Calcutta Stock Exchange, HDFC Bank had to pay around Rs 30 m on account of bank guarantee. The bank’s total capital market exposure is Rs 10.5 bn (Rs 6.5 bn funded exposure and Rs 5.5 bn non funded exposure). The management expects, payment of Rs 10 m further on account of these guarantees. However, the bank can take care of this loss with a buffer provision of Rs 1 bn.

HDFC Bank’s other income relating to non-fund based banking activities including commission, fees, forex earnings and income from debt securities will also be impacted as a result of volatility in the markets. Its other income, which showed a rise of 35% in 3QFY01, could slowdown in the 4QFY01.

Price performance
Particulars 31/03/01 1 mth 3 mths
Sensex 3,604 -15.6% -8.9%
HDFC Bank (Rs) 230 -13.4% 2.8%
At the current market price of Rs 217, HDFC Bank is trading at a P/E of 20 times its FY02 projected earnings and a Price/Book value ratio of 4.7 times. The bank’s ability to grow balance sheet without compromising on asset quality is probably its greatest attribute and provides confidence to investors. Its foray into new business areas and strategies adopted for customer acquisition will help maintain a healthy growth in its financials in the coming years. The stock is likely to trade at a premium compared to its peers in the sector with its strong growth performance.

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