HDFC, the largest housing finance company in the country, announced its FY03 results which showed a 19% growth in bottomline while its topline grew by a lower 10%. For 4QFY03 the company reported a 16% growth in bottomline while its topline grew by 9%. While it would seem that the topline and especially the bottomline growth has slowed down, we must point out that compared to its earlier quarters, its performance in 4QFY03 must be considered in light of a higher base. The company has also reported a significant improvement in operating margins mainly due to improvement in net interest income.
Income from Operations
Net interest income
Operating Profit Margin (%)
Provisions for contingencies
Profit before Tax
Profit after Tax/(Loss)
Net Profit Margin (%)
No. of Shares (m)
Diluted Earnings per share*
HDFC's topline growth has been mainly due to the robust growth in advances during the year. Loan disbursals in FY03 have increased by 31% compared to FY02. The retail segment has shown a better trend recording a 36% growth in disbursals over FY03. Growth in advances of the company is higher than the housing finance industry average. But despite this, HDFC is losing market share this indicates that other players are growing at a faster rate than the industry and hence capturing more of HDFC's market share. While HDFC has managed to hold ground, from here on it is likely to become more and more difficult for it to retain market share, due to competition from banks.
However looking at the operational performance of the company, the core interest income has grown by 13%. Operational income includes other heads like fee income, dividend income, lease rental income and other operating income. In this light the improvement in core operating income has been better than actual topline growth. Due to a healthy topline growth and falling cost of funds the company has been able to significantly improve net interest income as well as operating profits. A falling interest rate scenario has helped the company to lower its cost of funds. The benefits of improved net interest income are apparent in the way the operating margins have improved.
HDFC has increased its provisioning for FY03 by 9% compared to last year. But since we do not have the net NPA figures we will not be able to tell you whether the company has been able to improve its NPA situation in FY03. However, provisioning had increased by 11% in 9mFY03. But despite the growth in provisioning net NPAs to total assets stood increased at 1.29% in 9mFY03 (compared to 1.17% in 9mFY02).
The stock is currently trading at Rs 329, a P/E multiple of 12x its FY03 earnings. HDFC has been the leader in the housing loans industry, but increased competition from banks has slowly eroded its share in this market. Banks have become very agressive lately, offering housing loans at a lower rate compared to HDFC. While the company may be able to meet the challenge of banks as far as sourcing of low cost funds is concerned, its certainly behind others in terms of agressiveness. This is apparent from the loss in market share. Going forward, HDFC is expected to enter into an agreement with HDFC Bank to market its housing loans products through HDFC Bank. For this HDFC Bank is likely to receive part of the housing loan assets the bank sells, while HDFC is likely to receive fee income. However the details on the tie-up are not available, and therefore it is best not to speculate. Further clarity is needed on this issue in order to ascertain the prospects of this alliance going forward. The stock may lose further ground till the company is able to show tangible gains in market share.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407