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HDFC: Other income boosts profits
May 11, 2011

HDFC declared its results for the financial year 2010-2011 (FY11). The institution reported 12% YoY and 25% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Interest income grows 12% YoY in FY11 on the back of 20% YoY growth in advances.
  • Net interest margin improves slightly by 0.1% to 4.4% in FY11 from 4.3% in FY10.
  • Other income increases by 66% YoY in FY11 on the back of gains booked on sale of investments.
  • Net profit grows by 25% YoY for FY11 mainly due an increase in other income. For 4QFY11, profits grew by 23% YoY due to a spike in other income, but pressure due to rising interest costs was seen in the quarter.
  • It declared a dividend of Rs 9 per equity share, implying a dividend yield of 1%.


Standalone numbers
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Interest income 28,469 36,406 27.9% 111,289 124,932 12.3%
Interest Expense 15,595 21,300 36.6% 70,631 75,599 7.0%
Net Interest Income 12,873 15,106 17.3% 40,658 49,333 21.3%
Net interest margin       4.3% 4.4%  
Other Income 524 1,443 175.2% 2,320 3,849 65.9%
Other Expense 686 957 39.5% 3,636 4,320 18.8%
Provisions and contingencies 53 52 -0.9% 182 192 5.5%
Profit before tax 12,659 15,540 22.8% 39,160 48,670 24.3%
Tax 3,395 4,120 21.4% 10,895 13,320 22.3%
Effective tax rate 26.8% 26.5%   27.8% 27.4%  
Profit after tax/ (loss) 9,264 11,420 23.3% 28,265 35,350 25.1%
Net profit margin (%) 32.5% 31.4%   25.4% 28.3%  
No. of shares (m)       1,435.6 1466.9  
Book value per share (Rs)*         118.0  
P/BV (x)         5.6  
*(Standalone book value as on 31st March 2011)

What has driven performance in FY11?
  • HDFC's loan book grew at a strong pace (up 20% YoY) in FY11. Not including loans sold (securitized), the growth clocked was 24% YoY. While approvals grew by 24% YoY the disbursals grew by 20% YoY, compared to the same period last year. However, the financier saw a slight slow-down in the pace of approvals, disbursements and loans over the past 3 months since December, 2010. This was probably on account of the rising interest rate cycle, causing housing demand to slow in the past few months.

  • The individual portfolio was a saw approvals growing at 25% and disbursements at 27%. However, new NHB (National Housing Board) norms and RBI regulations which clamped down on the 'dual-rate' scheme that HDFC used to offer. Provisioning for these loans was increased 5 times to 2% of the outstanding loans. This was a huge growth engine for the company in its individual portfolio. Now, with the scheme ceasing to exist (ended in Dec 2010) and with a rising interest rate cycle, growth in this business saw some slowdown in the last quarter. The growth rates were close to 40% in the 9 months ended December 2010 (9mFY11). Loan growth for FY11 came in line with our estimates. We expect to see further pressure on growth rates over the next few quarters, and thus a moderation in growth rates next year as well.

  • Despite decent loan growth, the company saw only a 12% increase in interest income during FY11. The quarterly performance was better with the company seeing a 28% YoY increase in interest income in 4QFY11. However, the dismal 12 month performance on this front shows that the institution is losing pricing power to some extent with rampant competition in the space, case in point being SBI and other commercial banks. However, with banks facing rising NPA concerns on their home loan portfolios, this may turn in HDFCs favour. The net interest margin (NIM) improved by 0.1% to 4.4% from 4.3% in FY11. We were a little more conservative, estimating a 3.5% NIM for FY11.

    Loan book break up...
    (Rs m) FY10  FY11 Change
    Loans      
    Individuals 613,045 736,493 20.1%
    % of total 62.6% 62.9%  
    Corporate Bodies 351,187 421,407 20.0%
    % of total 35.8% 36.0%  
    Others 15,438 13,366 -13.4%
    % of total 1.6% 1.1%  
    Total loans 979,670 1,171,266 19.6%

  • HDFC's other income grew by 66% in FY11. Due to a sale of a stake in Lafarge Cement, other income increased by over 175% 4QFY11. Profit on sale of investments increased by around 72% YoY in FY11, a main contributor to the growth.

  • HDFC's gross NPAs (loans outstanding for more than 90 days) aggregated to 0.77% of the loan portfolio in FY11 (0.9% previously). The balance in the provision for contingencies account is around 1% of the overall loan portfolio.

  • 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 12.2% against a minimum requirement of 6%.

  • At the end of March 2011, the unrealised gains on HDFC's listed investments amounted to Rs 145.8 per share as against Rs 116.1 per share at the end of March 2010.

  • The cost to income ratio remained relatively benign at 7.7% in FY11 as compared to 7.9% in the previous year.

  • Net profits increased by 25% in FY11 due to a marginal increase in interest expense and a sharp increase in other income. This came in more or less in line with our estimates. In 4QFY11, net profits grew by 23%. This was mainly due to a 175% increase in other income due to sale of investments. If not for this, profit growth would have been relatively muted.

What to expect?
At the current price of Rs 662, the stock is trading at 3.7 times our estimated FY13 consolidated adjusted book value. In light of the increased NHB norms on HDFC's 'dual rate' loans, Rs 8.1 bn was used from its reserves. This includes a provisioning of Rs 4.5 bn on standard assets due to the'dual-rate' loans granted earlier. In the current rising interest rate scenario and on a higher base of individual home loans, growth for HDFC is unlikely to come in at a sharp clip. Margins are also expected to be subject to some pricing pressures. Due to the above reasons, we maintain our negative view on the stock at current levels. (Research Pro subscribers can view our latest update on the company).

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