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HDFC Bank: On growth spree

Apr 5, 2002

HDFC Bank has maintained its growth in the first nine months of FY02. A 43% jump in net income was fueled by a sharp rise in fee-based income and control on operating expenses. The bank’s operating margins however, declined by 300 basis points due to higher interest cost. The bank is expected to report over 30% growth in both topline and earnings for the year ended March 2002. On the one hand, fee based income would drive net profit growth, higher provisions and interest cost is likely to trim the growth. Although the bank’s cost to income ratio would decline in FY02, it is not expected to fall at a faster clip in the coming years, considering its ongoing expansion drive.

Financial snapshot
(Rs m) 9m FY01 9m FY02 Change FY01 FY02E Change
Interest Income 8,966 12,410 38.4% 12,595 17,193 36.5%
Other Income 1,284 2,293 78.5% 1,855 3,156 70.1%
Interest Expenses 5,354 7,971 48.9% 7,538 10,997 45.9%
Net Interest Income 3,613 4,439 22.9% 5,057 6,196 22.5%
Other Expenses 2,283 2,994 31.1% 3,096 4,094 32.2%
Operating Profit 1,330 1,445 8.7% 1,961 2,102 7.2%
Provisions and Contingencies 437 679 55.4% 666 996 49.6%
Profits before Tax 2,177 3,059 40.5% 3,151 4,262 35.3%
Tax 731 990 35.4% 1,049 1,446 37.8%
Profits after Tax 1,446 2,069 43.1% 2,101 2,816 34.0%
Equity shares (m) 243.3 281.2   243.3 281.2  

Key ratios
Particulars 9m FY01 9m FY02 FY01 FY02
Operating margins 14.8% 11.6% 15.6% 12.2%
Cost to income ratio 46.6% 44.5% 44.8% 43.8%
Other income / total income 12.5% 15.6% 12.8% 15.5%
Tax / PBT 33.6% 32.4% 33.3% 33.9%
NPM 16.1% 16.7% 16.7% 16.4%
EPS (Rs) 6.8 9.8 7.5 10.0

The bank continued its initiative to launch new products during the March quarter. It has launched international silver credit card in key metros including Mumbai, Chennai and Banglore. In the initial phase, the bank will focus on its existing customer base of nearly 2 million to generate card volumes. Among other plans, HDFC Bank aims to invest about Rs 660 m in technology in FY03. A major portion of which would be towards setting up new branches, installing ATMs, software development and augmenting telecom infrastructure. The bank, which presently has 152 branches in 66 cities with over 400 ATMs, plans to open another 75 branches and install 200 ATMs during FY03. Its expansion plans and marketing initiatives for new products are expected to keep operating expenses of the bank on the higher side in the current year. However, benefits of which would be reflected in better topline growth in the long term.

At the current market price of Rs 225, HDFC Bank is trading at a P/E of 22x and Price/Book value ratio of over 3x. The bank is expected to maintain a CAGR of about 20% in its earnings in the next four years. Its higher capital adequacy at 16% is likely to support its organic growth. The bank’s current premium valuations are due to its management & asset quality and ability to sustain high growth rates over the last five years. However, any slowdown in business growth due to competitive pressure is likely to impact its premium valuations.

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