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HDFC: Cut above the rest - Views on News from Equitymaster
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HDFC: Cut above the rest
Jul 16, 2008

Performance summary
  • Interest income rises 29% YoY in 1QFY09. Growth aided by a 25% YoY rise in advances.
  • Net profit grows 26% YoY in 1QFY09.
  • Loan approvals during the quarter grow by 30% YoY; Disbursements up by 28% YoY.
  • Capital adequacy ratio (CAR) at the end of June 2008 stood at a comfortable 15.9% (13.8% in 1QFY08), including Tier-I CAR of 14% (8% in 1QFY08).

(Rs m) 1QFY08 1QFY09 Change
Interest income 17,242 22,199 28.8%
Interest Expense 12,451 15,684 26.0%
Net Interest Income 4,790 6,516 36.0%
Net interest margin 3.7% 3.8%  
Other Income 1,062 987 -7.1%
Other Expense 775 967 24.8%
Provisions and contingencies 27 37 35.9%
Profit before tax 5,050 6,499 28.7%
Tax 1,322 1,818 37.5%
Effective tax rate 26.2% 28.0%  
Profit after tax/ (loss) 3,728 4,681 25.6%
Net profit margin (%) 21.6% 21.1%  
No. of shares (m) 253.0 284.2  
Book value per share (Rs)*   436.0  
P/BV (x)   4.0  
* (Standalone book value as on 30th June 2008)

What has driven performance in 1QFY09?
  • HDFC’s loan approvals grew by 30% YoY during 1QFY09. However, the growth in disbursements stood at 28%, seemingly taking into account the lagged impact of rising home loan interest rates. Subsequently, the disbursal to sanction ratio slowed down to 80% from 81% in 1QFY08. Importantly, the institution remains unscathed from the subprime mortgage woes that lenders across the world are bearing the brunt of. This is vindicated by the fact that its net NPAs have fallen to 0.71% at the end of June 2008, from 0.9% at the end of June 2007.

    Loan book break up…
    (Rs m) 1QFY08 1QFY09 Change
    Approvals 1,534,770 1,982,800 29.2%
    Disbursements 1,249,260 1,593,600 27.6%
    D/A ratio 81% 80%  
    Individuals 395,236 520,093 31.6%
    % of total 66.9% 67.3%  
    Corporate Bodies 181,635 234,278 29.0%
    % of total 30.8% 30.3%  
    Others 13,554 18,898 39.4%
    % of total 2.3% 2.4%  
    Total loans 590,425 773,269 31.0%

  • HDFC’s other operating income grew by 16% YoY in 1QFY09. This was largely on the back of strong rise in dividend income even as surplus from cash deployed with mutual funds declined by 2% YoY. The total other income has however shown a decline of 7% YoY during the quarter due to absence of profit on sale of investments (which was Rs 223 m in 1QFY08).

  • At a time when the financial sector is plagued with higher delinquencies, the institution has actually managed to reduce its net NPA levels and also sustain its NIMs at 3.8% (3.7% in 1QFY08).

What to expect?
At the current price of Rs 1,730 the stock is trading at a multiple of 3.3 times our estimated FY10 adjusted book value. The same is 2.5 times 1QFY09-adjusted book value including the unrealised gains on investments as reported by the institution. The stock has declined almost 47% since touching its all time high in January 2008. At the current levels, it presents an attractive long-term investment opportunity for investors.

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