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HDFC: Difficult quarter, stable year - Views on News from Equitymaster
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HDFC: Difficult quarter, stable year
May 4, 2009

Performance summary
  • Interest income grows 35% YoY in FY09 on the back of 16% YoY growth in loan book and 21% YoY growth in disbursements.
  • As per our estimate, net interest margin has dropped to 3.3% in FY09, from 3.6% in FY08. HDFC has not disclosed this figure for FY09.
  • Higher returns on investments lead to 82% YoY growth in other income besides nearly 50% growth in processing fees.
  • Net profit (excluding extraordinary item) grows by 35% YoY in FY09. Growth stands at 30% YoY in 4QFY09.
  • Gross NPA (non-performing assets) levels remain at 0.8% at the end of FY09. Declares dividend of Rs 30 per share for FY09 (dividend yield of 1.5%)

Standalone numbers
Rs (m) 4QFY08 4QFY09 Change FY08 FY09 Change
Interest income 22,403 29,350 31.0% 77,840 104,863 34.7%
Interest expense 13,598 20,641 51.8% 51,429 74,325 44.5%
Net Interest Income 8,805 8,709 -1.1% 26,411 30,538 15.6%
Net interest margin (%) 3.6% 3.3%
Other Income 774 2,174 180.9% 2,788 5,062 81.6%
Other Expense 663 569 -14.2% 2,993 3,486 16.5%
Provisions and contingencies 45 50 11.1% 166 175 5.4%
Profit before tax 8,871 10,264 15.7% 26,040 31,939 22.7%
Exceptional items** 2,046 12 -99.4% 7,695 252 -96.7%
Tax 3,235 2,942 -9.1% 9,372 9,365 -0.1%
Effective tax rate 36.5% 28.7% 36.0% 29.3%
Profit after tax/ (loss) 7,682 7,334 -4.5% 24,363 22,826 -6.3%
Net profit margin (%) 34.3% 25.0% 31.3% 21.8%
No. of shares (m) 284.0 284.5
Book value per share (Rs)* 461.9
P/BV (x) 4.2
(Book value as on 31st March 2009)
** Exceptional items include profit on sale of investments and sale of stake in Intelenet Global in FY08

What has driven performance in 4QFY09?
  • Stiff competition against public sector banks that got very aggressive in their home loan offerings thanks to their extensive CASA base (current and savings accounts), made things very difficult for HDFC in the last quarter of FY09. Most importantly, competing with the banks in terms of borrowing costs and passing on the same to its customers impacted the performance of HDFC in the most recent quarter. However, a look at full year FY09 performance shows that the institution has been reasonably healthy in terms of growth and profitability.

    Well in line with our estimates, HDFC’s disbursements grew by 21% YoY, while the approvals have grown by 16% YoY. Although the growth in loan book of 16% YoY is lower than our estimate of 20% YoY, it must be noted that during the year, HDFC sold loans amounting to Rs 42 bn, considering which growth in loan book is higher at 22% YoY. A bulk of the loans continues to be lent to retail borrowers, particularly with ticket size below Rs 3 m.

    Cautious growth
    (Rs m) FY08 % of total FY09 % of total Change
    Approvals 425,200 491,660 15.6%
    Disbursements 328,750 396,500 20.6%
    Disbursement / approval ratio 77.3% 80.6%
    Loans 733,276 851,980 16.2%
    Individuals 483,781 66.0% 548,894 64.4% 13.5%
    Corporates 231,017 31.5% 284,165 33.4% 23.0%
    Others 18,478 2.5% 18,921 2.2% 2.4%

  • HDFC’s other income grew by 82% YoY in FY09 due to the increase in gains from surplus cash deployed with the mutual funds. The institution also managed a healthy growth in its processing fee income. In FY08, the exceptional income was largely related to profit on sale of investment of the entire shareholding in Intelenet Global Services, which was earlier an associate company of HDFC.

  • HDFC’s gross NPA (loans outstanding for more than 90 days) aggregated to 0.8% of the loan portfolio in FY09 as against 0.9% in the corresponding period of the previous year. The balance in the provision for contingencies account was 0.7% of the loan portfolio in FY09. HDFC’s capital adequacy ratio (CAR) stood at 15% (CAR based on Tier I capital at 13.2%), as against the minimum requirement of 12%.

  • At the end of March 2009, the return on equity on HDFC’s consolidated as well as standalone books dropped to 17%, from 20% in FY08. The same is nevertheless higher than our estimates. The unrealised gains on investment per share dropped from Rs 360 at the end of FY08 to Rs 230 at the end of FY09.

What to expect?
At the current price of Rs 1,973, the stock is fairly priced at 2.6 times our estimated FY11 consolidated adjusted book value (4.2 times FY09 consolidated book value). We believe that while HDFC’s 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 institution needs to manage its competition with banks in terms of net interest margins more efficiently. While the rate of growth in advances may remain moderated in the medium term, the institution faces minimal risks in terms of capital and quality of assets.

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