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HDFC: Margins constant despite higher costs
May 7, 2012

HDFC declared its results for the full financial year 2011-2012 (FY12). The institution reported 20% YoY and 17% YoY growth in net interest income and net profits respectively. Here is our analysis of the results.

Performance Summary
  • Net interest income grows 20% YoY in FY12 on the back of a similar growth in advances.
  • Net interest margin remains at 4.4% in FY12.
  • Other income falls by 24.5% YoY in FY12 due to lower gains booked on sale of investments.
  • Net profit grows by 17% YoY for FY12 mainly due a fall in other income and increased taxes. For 4QFY12, profits grew by 16% YoY due to a fall in other income and higher other expenses.
  • Capital adequacy and gross NPAs stand at 14.6% and 0.7% respectively at the end of FY12.
  • Board declared a dividend of Rs 11 per equity share, implying a dividend yield of 1.7%.

(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Income from operations 36,406 48,057 32.0% 124,932 170,628 36.6%
Interest Expense 21,300 29,389 38.0% 75,599 111,568 47.6%
Net Interest Income 15,106 18,668 23.6% 49,333 59,060 19.7%
Net interest margin       4.4% 4.4%  
Other Income 1,443 853 -40.9% 3,849 2,907 -24.5%
Other Expense 957 1,221 27.5% 4,320 5,113 18.4%
Provisions and contingencies 52 59 12.2% 192 205 7.0%
Profit before tax 15,540 18,241 17.4% 48,670 56,648 16.4%
Tax 4,120 4,980 20.9% 13,320 15,430 15.8%
Effective tax rate 26.5% 27.3%   27.4% 27.2%  
Profit after tax/ (loss) 11,420 13,261 16.1% 35,350 41,218 16.6%
Net profit margin (%) 31.4% 27.6%   28.3% 24.2%  
No. of shares (m)         1477.0  
Book value per share (Rs)*         129.0  
P/BV (x)         5.1  

What has driven performance in FY12?
  • HDFC's loan book grew at a strong pace (up 20% YoY) in FY12. Not including loans sold (securitized), the growth clocked was 25% YoY. While approvals grew by 24% YoY the disbursals grew by 18% YoY, compared to the same period last year.

  • The institution saw a 37% YoY increase in interest income and a 20% YoY growth in net interest income during FY12. The quarterly performance saw a similar robustness. HDFC was able to maintain its margins even in a difficult environment as its net interest margin (NIM) remained steady at 4.4% in FY12.

    Cost break-up...
    (Rs m) FY11 FY12 Change
    Loans      
    Individuals 736,493 887,779 20.5%
    % of total 62.9% 63.0%  
    Corporate Bodies 421,407 501,896 19.1%
    % of total 36.0% 35.6%  
    Others 13,366 19,071 42.7%
    % of total 1.1% 1.4%  
    Total loans 1,171,266 1,408,746 20.3%

  • HDFC's other income fell by 24.5% in FY12. Other income fell by around 40% 4QFY12 on account of lower income booked on sales of investments.

  • HDFC's gross NPAs (loans outstanding for more than 90 days) aggregated to 0.74% of the loan portfolio in FY12 (0.77% previously). During the year, National Housing Bank (NHB) made further amendments to the provisioning requirements. Accordingly, HDFC is required to carry an additional provision in respect of NPAs and a general provision on commercial real estate assets at 1% (earlier this was 0.4%) and other standard loans at 0.40% (earlier nil). In addition, HDFC has to carry a 2% provision on standard assets in respect of housing loans granted under the Dual Rate Home Loan Scheme.

  • HDFC's capital adequacy ratio (CAR) stood at 14%, as against the minimum requirement of 12%, ensuring sufficient capital to grow in the medium term without any equity dilution. Tier 1 capital adequacy was 11.7% against a minimum requirement of 6%.

  • At the end of March 2011, the unrealised gains on HDFC's listed investments amounted to Rs 165.6 per share as against Rs 145.8 per share at the end of March 2011.

  • The cost to income ratio remained relatively benign at 7.6% in FY12 as compared to 7.7% in the previous year.

  • Net profits increased by 17% in FY12 despite a huge spike in interest expense and a sharp decrease in other income. This came in more or less in line with our estimates. In 4QFY12, net profits grew by 16%.

What to expect?
At the current price of Rs 663, the stock is trading at 3.5 times our estimated FY14 consolidated adjusted book value. In the prevailing interest rate scenario and on a high base of individual home loans, growth for HDFC is unlikely to come in at a sharp clip going forward. HDFC was able to maintain its margins at 4.4% in FY12, but it still saw some pressure on its net interest income (NII) due to higher costs of funds. However, with the RBI undertaking some monetary policy easing, HDFC should soon be able to capitalize on the same. We maintain our negative view on the stock at current levels on account of expensive valuations.

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