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HDFC: Strong performance

May 14, 2002

HDFC reported better than expected results for the year ended March 2002. A growth of 14% in income from operations is in line with our projections. However, a 23% rise in earnings is higher than our expectations of 18%, on the back of a sharp improvement in operating margins.

(Rs m) FY01 FY02 Change
Income from operations 22,737 25,802 13.5%
Other Income 1,086 1,199 10.4%
Interest expense 16,896 18,712 10.7%
Net interest income 5,841 7,090 21.4%
Other expenses 1,291 1,297 0.5%
Operating Profit 4,550 5,792 27.3%
Operating Profit Margin (%) 20.0% 22.4%  
Provisions and contingencies 80 83 3.1%
Profit before Tax 5,557 6,909 24.3%
Tax 820 1,109 35.3%
Profit after Tax/(Loss) 4,737 5,800 22.5%
Net profit margin (%) 20.8% 22.5%  
No. of Shares (m) 120.1 121.7  
Diluted Earnings per share* 38.9 47.7  
P/E Ratio   13.6  

During the year, HDFC's loan approvals and disbursements grew at a strong rate of over 31%. Consequently, its interest income on loans increased by 22% in FY02. Lower investment income (mainly from dividend) however, curtailed the topline growth of the company to 14%. The company's investments in subsidiary companies increased by 46% to Rs 4 bn in FY02. These investments are likely to take some time before making any significant impact on HDFC's financial performance. HDFC's entry into new ventures (insurance, IT services and mutual fund) is unlikely to contribute significantly to its topline in the near term.

Revenue mix
(Rs m) FY01 FY02 Change
Interest on loans 16,263 19,819 21.9%
Dividends 1,217 760 -37.6%
Lease rental income 475 507 6.8%
Other operating income 4,782 4,716 -1.4%
Total 22,737 25,802 13.5%

Despite stiff competition in the housing finance market and the consequent intense interest rate war, HDFC improved its operating margins by over 200 basis points to 22.4%. Lowering interest cost and cost control measures accrued higher margins to the company. HDFC's cost to income ratio declined to 16% in FY02 from 19% in the previous year. The company also maintained its asset quality in the tough economic environment. Its net NPA to advances ratio of 0.9% is amongst the lowest in the sector.

At the current market price of Rs 648, HDFC is trading at a P/E of 14x and Price/Book value ratio of 3x. The company's premium valuations are due to its strong growth rates over the last few years, superior quality of its assets and better interest margins. HDFC's higher capital adequacy ratio at 14.5% as on March 2002 would facilitate it in its expansion plans. However, increasing competition from both foreign and other private sector banks in the housing finance market could trim HDFC's earnings growth and consequently its valuations.

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