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From inside the house to beyond - Views on News from Equitymaster
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  • Apr 12, 1999

    From inside the house to beyond

    To quote an Indian fund manager 'there are only two currencies the Indian investor can feel absolutely safe about - gold and Housing Development Finance Corporation (HDFC)'. While this claim may sound exaggerated to some, it is not very far from the truth. That's the reason why the HDFC stock is picked by fund managers who want to lend a degree of stability to their portfolios.

    HDFC is India's premier housing finance company, with an extensive distribution network (52 offices as on July 1999) and with an impressive range of deposits and loan products offered across more than 2,400 towns and cities. Over the years, the company has become the first stop for house-hunters seeking finance. It's a one-stop shop offering a variety of services ranging from home loans (fixed and floating rates), home improvement loans, home extension loans to short term bridging loans to both resident Indians as well non-resident Indians (NRIs).

    Apart from its impressive range of services, HDFC's commitment to high service standards is another reason why borrowers rarely look beyond the company to address their housing finance needs. For instance, HDFC borrowers can expect their cheque within a week, and don't have to wait for over a month, as is the case with some of its competitors. Service standards apart, HDFC has conducted the housing finance business with acumen, applying a very conservative approach. This has seen the company build up a high quality portfolio with loans given against existing mortgage. This allows the company superior credit control with a tight leash on non-performing loans (NPLs).

    Housing finance has received a major fillip with the tax breaks offered in the Union Budget for financial year 2000. The tax sops offered to borrowers witnessed a spurt in demand for housing finance, making it very attractive for other companies (like ICICI) who had kept at arms length from housing finance. Since then, more companies have invaded HDFC's turf offering borrowers with more finance options.

    Contrary to expectations, rising competition and falling lending rates have not a made dent in the company's spreads. (Spread can be defined as the difference between the rate at which a company borrows funds and the rate at which it lends the same.) While other housing companies are facing downward pressure on spreads, HDFC has maintained its level (5 basis points in first half of financial year 2000) largely due to superior cost control.

    In a strategic move, the company has decided to leverage its brand appeal, distribution network and large customer base by venturing into consumer finance. It has set a target of Rs 1.5 billion ($35 million) over 12 months, but could disburse only Rs 100 million ($2.3 million) by July. This is largely due to the company's cautious strategy of lending only to the existing home loan borrowers before moving on to other borrowers.

    Over a period of years, the company's efficiency and strong brand name has caught the eye of overseas investors, with Standard Life Assurance, Europe's largest mutual insurance company, buying 5 percent stake in the company. Warburg Pincus, an investment bank, has also picked up 6 percent stake in HDFC. Both these investors can't seem to get enough of the company and will both buy an additional 10 percent stake in the company from the secondary market. Standard Life will lead HDFC's foray in the insurance and mutual fund (MF) businesses.

    Investment in the MF business will have synergies for both the partners. HDFC's strengths lie in its distribution network, investment management skills, and back office processing. Moreover, HDFC has experience in equity research and advises Commonwealth Equity Fund, the Invesco India Growth Fund and the Standard Life group. In addition to that, HDFC has its own investment portfolio of Rs 24.5 billion ($ 570 million), with approximately Rs 3.4 billion ($79 million) in equities. These synergies will also hold good for HDFC's insurance and securitisation ventures.

    With housing finance needs on the rise, local/foreign banks and finance companies have also stepped into the fray. Competition in its traditional business is bound to have some impact on HDFC. Over a period of time, HDFC's dominating market share will shrink, and spreads will come under pressure. Competition is something it will have to deal with even in the consumer finance, MF and insurance businesses.

    HDFC has played its cards with a lot of caution. Few analysts doubt the prospects of its gamut of businesses. While the transition from its traditional housing business to non-traditional businesses has been smooth so far, only time will tell whether it can duplicate its success in housing in the other businesses.



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