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HDFC: Competition blues - Views on News from Equitymaster
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  • May 7, 2003

    HDFC: Competition blues

    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.

    (Rs m) FY02 FY03 Change
    Income from Operations 26,924 29,673 10.2%
    Other Income 77 83 7.2%
    Interest Expenses 18,712 19,698 5.3%
    Net interest income 8,212 9,975 21.5%
    Other Expenses 1,297 1,458 12.4%
    Operating Profit 6,914 8,517 23.2%
    Operating Profit Margin (%) 25.7% 28.7%  
    Provisions for contingencies 83 90 9.1%
    Profit before Tax 6,909 8,510 23.2%
    Tax 1,109 1,607 44.9%
    Profit after Tax/(Loss) 5,800 6,903 19.0%
    Net Profit Margin (%) 21.5% 23.3%  
    No. of Shares (m) 121.7 244.4  
    Diluted Earnings per share* 23.7 28.2  
    P/E Ratio   11.6  

    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.



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