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HDFC: Margins show resilience

Jul 9, 2011

HDFC declared its results for the first quarter of the financial year 2011-12 (FY12). The institution has reported a robust 36% growth in interest income while net profits have grown by 22% YoY. Here is our analysis of the results.

Performance summary
  • Interest income grows by a robust 36% YoY in the first quarter of FY12 on the back of 21% YoY growth in advances.
  • Net interest margin sustains at 4% in 1QFY12 as in 1QFY11 despite an increase in the cost of funds.
  • Other income sees a sharp increase on account of profits from the sale of investments.
  • Net profit grows by 22% YoY mainly on account of higher other income.
  • Capital adequacy stands at 13.8% and there were nil net NPAs (non performing assets) at the end of 1QFY12.

Financial picture
(Rs m) 1QFY11 1QFY12 Change
Interest income 27,971 38,007 35.9%
Interest Expense 17,196 25,149 46.3%
Net Interest Income 10,775 12,858 19.3%
Net interest margin 4.0% 4.0%  
Other Income 48 209 334.2%
Other Expense 968 1,087 12.3%
Provisions and contingencies 190 225 18.2%
Profit before tax 9,666 11,755 21.6%
Tax 2,720 3,310 21.7%
Effective tax rate 28.1% 28.2%  
Profit after tax/ (loss) 6,946 8,445 21.6%
Net profit margin (%) 24.8% 22.2%  
No. of shares (m)   1469.9  
Book value per share (Rs)*   122.9  
P/BV (x)   5.8  
* (Standalone book value as on 30th June 2011)

What has driven performance in 1QFY12?
  • Since the 'teaser' rate home loan scheme has been discontinued, plus due to the central bank's monetary tightening, HDFC saw some slowdown in its approvals and disbursals. Approvals grew by 22%, while disbursals grew at 20% compared to 1QFY11. Irrespective, HDFC's loan book grew at a strong pace (up 22% YoY) in 1QFY12.

    Loan book break up...
    (Rs m) 1QFY11 1QFY12 Change
    Individuals 641,375 778,860 21.4%
    % of total 63.1% 62.7%  
    Corporate Bodies 359,668 448,233 24.6%
    % of total 35.4% 36.1%  
    Others  15,204 14,585 -4.1%
    % of total 2.3% 2.4%  
    Total loans 1,016,247 1,241,677 22.2%

  • HDFC's other income grew almost 4 times in 1QFY12, on account of profit booking on its investments. This helped contribute towards the bottom-line.

  • HDFC's gross NPAs (loans outstanding for more than 90 days) aggregated to 0.8% of the loan portfolio in 1QFY12 (0.9% previously). The balance in the provision for contingencies account is 0.9% of the overall loan portfolio. The company had to carry a provision of Rs 4.5 bn on account of housing loans under the teaser/dual rate schemes.

  • The institution's capital adequacy ratio (CAR) stands at 13.8%, as against the minimum requirement of 12%, ensuring sufficient capital to grow in the medium term without any equity dilution. Tier capital was a robust 12.2% against a minimum of 6%.

  • At the end of June 2011 the unrealised gains on HDFC's listed investments amounted to Rs 158 per share as against Rs 115 per share at the end of June 2010.

What to expect?
At the current price of Rs 712, the stock is trading at 4.6 times our estimated FY14 consolidated adjusted book value. Research Pro subscribers can view our latest update on the company. 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 going forward. HDFC was able to maintain its margins at around 4% this quarter, but one could see some pressure on its net interest income (NII). Margins are also expected to be subject to some pricing pressures going forward, and the RBI's interest rate policy will have to be watched for further tightening. Due to the above reasons, we maintain our negative view on the stock at current levels.

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