Over the past few years, HDFC has maintained consistent financial performance. In the recent years the company is diversifying from its core business of housing to areas such as IT, insurance, asset management and commercial banking.
HDFC has opened separate subsidiaries for its other businesses. Its commercial banking venture has proved to be the most profitable. (Currently the company has around 28% stake in HDFC Bank.) On a consolidated basis, the subsidiaries contribute 9% to total profits and 4% to revenues.
Performance of subsidiaries
HDFC Asset Management
HDFC Trustee Company
HDFC Standard Life
Intelenet Global Services
NA: Not Available
HDFC has invested about Rs 2.8 bn in these ventures till date, which have resulted in a return on investment (ROI) of over 15%. On the other hand HDFC’s returns from its core business of housing stands at 20%. However, if we remove the amount invested (Rs 1,200 m) in the insurance venture, the ROI will shoot up to 27%. Insurance being a relatively new area, it is likely to take atleast six years for the company to break even.
HDFC is using all its channels efficiently for the distribution of insurance products. The company has a network of 50,000 agents and 1.2 m depositors. Also, HDFC Bank has a customer base of about 1.5 m. HDFC is capitalizing on its brand name and wide network of agents to generate revenues from insurance venture. The sector presents huge untapped potential, as penetration of insurance in India is just 22%. Currently, the product in India is bought generally as a tax saving instrument. As more are more people are educated about benefits of insurance, volumes are likely to increase. However, the market is becoming competitive with the entry of several private insurers. To capture a reasonable market share, HDFC will have to continuously introduce innovative products.
Excluding HDFC Developers and HDFC Investments Company, all the other subsidiaries are making losses. Return on assets on the Gruh Finance at 17% is however encouraging, as HDFC has taken a stake at relatively low price. GRUH’s own ROA is a marginal 1.2%. HDFC Securities is facing tough conditions from the other players and Intelenet Global Services has not yet started its business. Intelenet is a joint venture with TCS to provide IT enabled services to prospective clients in US. The company has already built a call centre at Navi Mumbai. The business has however not started.
HDFC has set the road map for the future growth. While its investments in new businesses may not yield immediate returns, they are likely to enhance HDFC’s returns on equity over the medium term. It will also help in expanding its customer base and provide more credence to its cross-selling efforts. However, it will not be easy for the company to replicate the success of housing finance business.
At the current market price of Rs 667, the stock is trading at a P/E of 15 times and Price to Book value ratio of 3x its consolidated FY01 earnings.
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