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HDFC: Tax liabilities suppress profits - Views on News from Equitymaster

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HDFC: Tax liabilities suppress profits
May 6, 2015

HDFC declared its results for the fourth quarter (4QFY15) and financial year ended March 2015 (FY15). The institution has reported 13.5% YoY growth in net interest income while net profits have grown by modest 10% YoY during FY15. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 13.5% YoY in FY15 on the back of 15.8% loan book expansion. The individual loan book reports healthy 23% YoY growth
  • Net interest margin remain stable at 4% for FY15.
  • Other income increases by staggering 39.6% YoY on the back of superior investment gains.
  • Net profit remains restricted to 10.1% YoY for 9mFY15 on account of higher provisions and deferred tax liabilities.
  • Capital adequacy and gross NPAs stand at 18.9% and 0.7% respectively at the end of March 2015.
  • The board declared dividend of Rs 13 per share over and above the interim dividend of Rs 2 per share (dividend yield 1.3%).

Standalone financial performance snapshot
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Interest income† 64,010 70,439 10.0% 233,384 262,716 12.6%
Interest Expense 41,405 45,829 10.7% 160,293 179,750 12.1%
Net Interest Income 22,605 24,610 8.9% 73,091 82,966 13.5%
Net interest margins       4.0% 4.0%  
Other Income 2,466 4,124 67.2% †8,590 11,991 39.6%
Other Expense 1,241 1,700 37.0% †6,280 7,066 12.5%
Provisions and contingencies 300 500 66.7% †1,000 1,650 65.0%
Profit before tax 23,530 26,534 12.8% 74,401 86,241 15.9%
Tax 6,300 6,712 6.5% 20,000 22,692 13.5%
Effective tax rate 26.8% 25.3%   26.9% 26.3%  
Deferred Tax Liability ††-†† † 1,197.0   -†† 3,647.0  
Profit after tax/ (loss) 17,230 18,625 8.1% 54,401 59,902 10.1%
Net profit margin (%) 26.9% 26.4%   23.3% 22.8%  
No. of shares (m)         1,575  
†Book value per share (Rs)*†         196.7  
†P/BV (x)†         5.9  
* (Standalone book value as on 31st March 2015)

What has driven performance in FY15?
  • On account of growing demand for loans for home buying by individuals, HDFC's loan book reported a healthy growth. While the demand for retail loans has remained strong, 78% of the incremental growth in loan book during FY15 has come from individual loan portfolio. The average size of individual loans stood at Rs 2.3 m as against Rs 2.2 m in FY14.

  • The institution reported 15.8% YoY growth in total loan book. Overall, the individual loans comprise 71% of the total loan book.

    Loan book break up...
    (Rs m) FY14 FY15 Change
    Loans
    Individuals 1,317,142 1,620,085 23.0%
    % of total 66.8% 71.0%  
    Corporate Bodies 520,413 †593,271 14.0%
    % of total 26.4% 26.0%  
    Others 133,445 68,454 -48.7%
    % of total 6.8% 3.0%  
    Total loans 1,971,000 2,281,810 15.8%

  • HDFC sold loans to the tune of Rs 251 bn in FY15. The entity continues to service these loans and is entitled to the residual interest on the loans sold. The residual interest on the individual loans sold is 1.25% p.a. and is being accounted over the life of the loans and not on an upfront basis.

  • The profits for FY15 grew by 10.1% YoY purely on the back of higher non-interest income. Provisions for the quarter have increasingly gone up restricting the earnings growth, but asset quality remains stable for HDFC.

  • HDFC's distribution network spans 378 outlets, which include 103 offices of HDFC's distribution company, HDFC Sales Private Limited (HSPL). The operating costs have remained subtle during the nine months. The cost-income ratio at 7.5% has remained benign and stands as one of the lowest in the industry.

  • The individual portfolio has reported 0.5% as GNPAs; while the non-individual portfolio stood at 1.0%. Nonetheless, the asset quality of HDFC Ltd continues to be one of the best in the industry.
What to expect?

At the current price of Rs 1163, the stock is trading at 4.6 times our estimated FY17 adjusted book value.

The higher provisions and tax liabilities during FY15 dented the profits for HDFC. That said, the stability in asset quality and spreads despite the testing times is a matter of comfort. Led by strong demand from the retail customers, HDFC's loan book is poised to grow. We expect the business growth to remains strong and margins stable for the company going forward.

We recommend investors to hold on to the stock as it as a good long-term bet given the resilient balance sheet, sustained margins and good asset quality. However, investors should not buy more of the stock at current levels.

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