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HDFC: Holding on to its own

May 3, 2010

HDFC declared its FY10 results. The institution has reported 1% growth in interest income while net profits have grown by 24% YoY. Here is our analysis of the results.

Performance summary
  • Interest income grows 1% YoY in FY10 on the back of 15% YoY growth in advances
  • Net interest margin remains stable at 4% in FY10 despite downward re-pricing of loans..
  • Cash surpluses and profit on sale of investments help the growth in other income.
  • Net profit grows by 24% YoY due to lower provisioning and controlled operating expenses.
  • Capital adequacy and net NPAs stand at 14.6% and 0.1% respectively at the end of FY10.
  • Announced stock split in the ratio of 5:1, post board approval.

(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Interest income  31,457 28,468 -9.5% 109,714 111,288 1.4%
Interest Expense 20,641 15,595 -24.4% 74,324 70,630 -5.0%
Net Interest Income 10,816 12,873 19.0% 35,390 40,658 14.9%
Net interest margin       4.0% 4.0%  
Other Income 79 524 566.1% 461 2,319 403.0%
Other Expense 568 686 20.8% 3,487 3,636 4.3%
Provisions and contingencies 50 53 6.0% 175 182 4.0%
Profit before tax 10,277 12,658 23.2% 32,189 39,159 21.7%
Tax 2,942 3,395 15.4% 9,365 10,895 16.3%
Effective tax rate 28.6% 26.8%   29.1% 27.8%  
Profit after tax/ (loss) 7,335 9,263 26.3% 22,824 28,264 23.8%
Net profit margin (%) 23.3% 32.5%   20.8% 25.4%  
No. of shares (m)       284.5 287.1  
Book value per share (Rs)*         529.3  
P/BV (x)         5.3  
* (Standalone book value as on 31st March 2010)

What has driven performance in FY10?
  • HDFC did follow the footsteps of its competitors in FY10 in terms of pricing its assets. But the same is yet to show any impact on the institution’s performance. While an initial reckoning of HDFC’s results give the impression that competition from banks has dealt a heavy blow on the institution’s FY10 performance, a closer look assures retained profitability. Despite the relaxed interest rates on home loans during the past 12 months, the same failed to show any substantial impact on HDFC’s loan book as the same grew at a muted pace (up 9% YoY) in FY10. Meanwhile the approvals have grown by 22% YoY and the disbursals grew by 27% YoY. Having said that HDFC remains unscathed from the asset slippage woes that lenders across the world are bearing the brunt of.

    Loan book break up...
    (Rs m) FY09  FY10 Change
    Approvals 496,110 606,110 22.2%
    Disbursements 396,500 504,130 27.1%
    D/A ratio 80% 83%  
    Individuals 548,894 613,045 11.7%
    % of total 66.9% 67.3%  
    Corporate Bodies 284,165 351,187 23.6%
    % of total 30.8% 30.3%  
    Others 18,921 15,437 -18.4%
    % of total 2.3% 2.4%  
    Total loans 851,980 979,669 15.0%

  • HDFC’s other income grew nearly 4 times in FY10 due to the income from sale of investments. The same may, however, not be sustainable going forward.

  • HDFC’s gross NPAs (loans outstanding for more than 90 days) aggregated to 0.8% of the loan portfolio in FY10 (0.9% in 9mFY10). The balance in the provision for contingencies account was is 0.7% of the overall loan portfolio.

  • HDFC’s capital adequacy ratio (CAR) stood at 14.6%, as against the minimum requirement of 12%, ensuring sufficient capital to grow in the medium term without equity dilution.

  • At the end of March 2010 the unrealised gains on HDFC’s listed investments amounted to Rs 581 per share as against Rs 230 per share at the end of March 2009.

What to expect?
At the current price of Rs 2,803, the stock is trading at 3.7 times our estimated FY12 consolidated adjusted book value. HDFC’s loan growth and profitability are in line with our estimates. HDFC’s unique business model (sales through direct selling agents and arrangement with HDFC Bank) will enable it to sustain a low cost to income ratio and enjoy operating leverage. The management has indicated that the timely re-pricing of loans will ensure that its spreads are protected. We maintain our positive view on the stock.

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