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HDFC: Anchoring to core business - Views on News from Equitymaster

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HDFC: Anchoring to core business

Apr 30, 2008

Performance summary
  • Interest income grows 47% YoY in FY08 on the back of 29% YoY growth in advances
  • Net interest margin improves to 4.0% in FY08, from 3.7% in FY07.

  • Cash surpluses and returns on them keep other income stable.

  • Asset management subsidiary aids consolidated bottomline; insurance subsidiaries still in investment phase

  • Consolidated bottomline grows by 55% YoY in FY08 buoyed by extraordinary income due to profit on sale of part of the stake in HDFC Standard Life to Standard Life Group. Excluding the extraordinary item, the bottomline has grown by 17% YoY in FY08.

(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Interest income 15,275 22,402 46.7% 53,140 77,839 46.5%
Interest Expense 10,050 13,597 35.3% 36,669 51,429 40.3%
Net Interest Income 5,225 8,805 68.5% 16,472 26,410 60.3%
Net interest margin       3.7% 4.0%  
Other Income 2,061 799 -61.2% 5,491 4,120 -25.0%
Other Expense 474 664 40.1% 2,442 2,993 22.6%
Provisions and contingencies 52 45 -13.5% 174 166 -4.6%
Profit before tax 6,760 8,895 31.6% 19,347 27,371 41.5%
Extraordinary items 0 2,020   329 6,362 135.8%
Tax 1,260 3,235 156.7% 3,974 9,372 135.8%
Effective tax rate 18.6% 36.4%   20.5% 34.2%  
Profit after tax/ (loss) 5,500 7,680 39.6% 15,702 24,361 55.1%
Net profit margin (%) 36.0% 34.3%   29.5% 31.3%  
No. of shares (m)       253.0 284.0  
Book value per share (Rs)*         420.7  
P/BV (x)         6.6  
* (Standalone book value as on 31st March 2008)

What has driven performance in FY08?
  • Demand continues to kick in: The spike in home loan interest rates during this fiscal, which have not been commensurate to the rise in income levels, has had a lagged impact on HDFC’s incremental approvals, albeit marginally. While the approvals have grown by 29% YoY, the disbursal to sanction ratio has also slowed down to 82% from 81% in FY08. However, the steady demand for the loans helped the institution grow its loan book by 29% YoY in this fiscal. HDFC remains unscathed from the subprime mortgage woes that lenders across the world are bearing the brunt of. Resultantly the company’s net NPAs have remained below 1% level (0.8% in FY08, 0.9% in FY07) in this fiscal as well

    Loan book break up…
    (Rs m) FY07 FY08 Change
    Approvals 1,457,640 1,882,840 29.2%
    Disbursements 1,192,810 1,521,560 27.6%
    D/A ratio 82% 81%
    Individuals 392,760 486,166 23.8%
    % of total 69.5% 66.6%
    Corporate Bodies 161,060 224,834 39.6%
    % of total 28.5% 30.8%
    Others 11,302 18,249 61.5%
    % of total 2.0% 2.5%
    Total loans 565,123 729,979 29.2%

  • Other income – Reliant on cash surpluses: HDFC’s other operating income grew by 10% YoY in FY08 due to the trebling of surplus cash deployed with the mutual funds. The same may, however, not be sustainable going forward. The unrealised gains on its listed investments at the end of the March quarter stood at Rs 360 per share of HDFC. It must also be noted that the profits earned on the sale of part of the stake in HDFC Standard Life in 3QFY08 has been shown as extraordinary income in the income statement.

  • Consolidated picture: HDFC’s core business, that is mortgage financing, continues to stand in good stead for the institution. In terms of revenue, this segment is by far the largest contributor, with the asset management business also showing some signs of growth.

    Breakup of consolidated revenue
    Revenue (Rs m) FY07 % of total FY08 % of total Change
    Housing 60,428 92.6% 83,986 93.7% 39%
    Life Insurance 226 0.3% 847 0.9% 275%
    General Insurance 53 0.1% 63 0.1% 19%
    Asset Management 2,135 3.3% 3,987 4.4% 87%
    Call centre and data processing 1,914 2.9% - 0.0% -100%
    Others 511 0.8% 778 0.9% 52%
    65,267 89,661

    The life and general insurance subsidiaries of the institution continue to remain in the investment phase and it will be some time before the company manages to unlock value from the same.

    Breakup of consolidated operating profit
    Operating profit (Rs m) FY07 % of total FY08 % of total Change
    Housing 20,048 99.4% 34,327 99.8% 71%
    Life Insurance (1,255) -6.2% (2,435) -7.1% 94%
    General Insurance 25 0.1% (168) -0.5%  
    Asset Management 1,196 5.9% 2,403 7.0% 101%
    Call centre and data processing (12) -0.1% - 0.0% -100%
    Others 157 0.8% 278 0.8% 77%
      20,159   34,405    

What to expect?
At the current price of Rs 2,780, the stock is trading at 5.8 times our estimated FY10 adjusted book value. HDFC’s unique business model (sales through direct selling agents and arrangement with HDFC Bank) enables it to sustain the lowest cost to income ratio (9.8% in FY08) and enjoy operating leverage. The management has indicated that the timely lending rate hikes will ensure that its spreads are protected. However, this may have an impact on its asset growth.

In search for new avenues of growth, the institution is now targeting smaller cities, where real estate prices have risen, but not as much as the rise witnessed in metros and other large cities. HDFC's ability to profitably sustain market share in mortgage portfolio and enhance its fee income share will determine its growth going forward. Notwithstanding the fact that our concerns with respect to quality of real estate loans were vindicated in FY08, we see improving prospects for the HFC, given its risk averseness, in the medium to long term.

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