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HDFC: Expectations

Jul 16, 2001

HDFC is expected to announce its first quarter results in the current week. The company had reported over 18% growth in profits for the year ended March ’01 with a marginal improvement in operating margins. HDFC’s approvals and disbursals have shown a robust growth rate of 30% and 29% respectively in FY01. This was remarkable considering the industrial slowdown beginning 4QFY01. The housing finance sector is expected to grow by about 20% in the current year.

The tax benefits announced in the budget for FY02, coupled with the low real estate prices, is expected to spur housing demand in the country. 70% of HDFC’s loans are to the retail segment and 82% of its deposits are from individuals and trusts. Exposure to retail segment has offered the company relatively higher interest spread at about 2%. With mutual funds failing to offer attractive yields and ban on deferral products, HDFC’s current deposit base of Rs 72.5 bn is likely to increase considerably in the current year. However, on the lending side the company could face strong competition from ICICI, SBI and other public sector banks.

Quarterly analysis
(Rs m)1QFY991QFY001QFY011QFY02E4 qtr CAGR
Total Income 3,960 4,492 5,527 6,356 17.1%
Interest Expense 2,880 3,287 4,117 4,572 16.7%
Operating Profit 1,074 1,201 1,405 1,778 18.3%
Other Expenses 169 192 251 303 21.6%
Depreciation 133 120 108 126 -1.8%
Profit before Tax 779 893 1,052 1,355 20.3%
Tax 123 137 141 176 12.7%
Profit after Tax 656 756 911 1,179 21.6%
No. of shares (m) 119.1 119.1 119.1 119.1  

Key ratios
Tax / PBT15.8%15.3%13.4%13.0%
EPS (Rs)22.025.430.639.6

HDFC’s first quarter total income is expected to rise by 15% and profits are projected to jump by about 29%. A substantial rise in operating margins will be largely due to low cost of funds (retail deposits). HDFC’s lending rates have not declined in proportion to fall in deposit rates. This would fuel its operating margins.

The company’s diversification into other areas including mutual fund, insurance and IT although considered to be revenue boosters, in the short term these businesses are unlikely to add to its bottomline. Insurance business where the company has made maximum investment would breakeven only after 5 years. Comparatively higher returns than housing finance business (ROE of 20%) has forced the company to venture into these areas.

At the current market price of Rs 665, HDFC is trading at a P/E multiple of 14.5x and Price/Book value (PBV) ratio of 2.9x FY02 projected earnings. In the past five years, the stock’s P/E was in the range of 10-15 times and PBV was in the range of 1.7 – 3 times.

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