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HDFC:'Dual' pricing hurts

Jul 14, 2010

HDFC declared its 1QFY11 results. The institution has reported a flat 0.2% growth in interest income while net profits have grown by 23% YoY. Here is our analysis of the results.

Performance summary
  • Interest income remains flat (grows 0.2% YoY) in 1QFY11 on the back of 17% YoY growth in advances.
  • Net interest margin improved marginally to 4% in 1QFY11 despite downward re-pricing of loans.
  • Other income fell as there were no profits from sale of investments compared to Rs 513 m last year.
  • Net profit grows by 23% YoY mainly due to lower interest expense.
  • Capital adequacy and net NPAs stand at 14.8% and 0.2% respectively at the end of 1QFY11.

Standalone numbers
(Rs m) 1QFY10 1QFY11 Change
Interest income  27,929 27,971 0.2%
Interest Expense   19,628      17,196 -12.4%
Net Interest Income 8,301      10,775 29.8%
Net interest margin 3.8% 4.0%  
Other Income 562      48 -91.4%
Other Expense 1,024 1,118 9.2%
Provisions and contingencies   40      40 1.0%
Profit before tax 7,799 9,666 23.9%
Tax 2,150 2,720 26.5%
Effective tax rate 27.6% 28.1%  
Profit after tax/ (loss) 5,649 6,946 23.0%
Net profit margin (%) 20.2% 24.8%  
No. of shares (m) 284.6 291.0  
Book value per share (Rs)*   562.3  
P/BV (x)   5.5  
* (Standalone book value as on 30th June 2010)
* (During 1QFY11 profit on sale of investments was nil as compared to Rs 513 m in 1QFY10)

What has driven performance in FY10?
  • In its attempt to compete with banks offering 'teaser' rates on home loans, HDFC offered dual rate (very low rate locked in for the initial 1 to 2 years) products that had an impact on the pricing of its assets. These lower interest rates caused spreads to fall. However, the same helped HDFC's loan book to grow at a strong pace (up 17% YoY) in 1QFY11. Meanwhile the individual approvals have grown by a healthy 56% YoY and the disbursals grew by 62% YoY. Thus despite a healthy loan growth, the institution showed a paltry growth in interest income.

  • HDFC's other income fell by over 90% in 1QFY11. This quarter there were no profits from the sale of investments which contributed Rs 513 m to other income in the previous quarter.

  • HDFC's gross NPAs (loans outstanding for more than 90 days) aggregated to 0.9% of the loan portfolio in 1QFY11 (0.8% in FY10). The balance in the provision for contingencies account is 1% of the overall loan portfolio.

  • HDFC's capital adequacy ratio (CAR) stands at 14.8%, as against the minimum requirement of 12%, ensuring sufficient capital to grow in the medium term without any equity dilution.

  • At the end of June 2010 the unrealised gains on HDFC's listed investments amounted to Rs 577 per share as against Rs 401 per share at the end of June 2009.

What to expect?
At the current price of Rs 3,078, the stock is trading at 2.9 times our estimated FY13 consolidated adjusted book value. (Research Pro subscribers can view our latest update on the company.) HDFC's loan growth and profitability are in line with our estimates. The management has indicated that the timely re-pricing of loans will ensure that its spreads are protected. However with the new base rate regime coming in place, borrowings from banks which contribute over 30% of its borrowings may get more expensive. Since the stock has breached our target price we advice caution at these levels.

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