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HDFC: Margins save the day

Jul 22, 2009

Performance summary
  • Interest income grows 20% YoY in 1QFY10 on the back of 13% YoY growth in loan book and 21% YoY growth in disbursements.
  • As per our estimate, net interest margin has improved to 3.8% in 1QFY10, from 3.5% in 1QFY09. HDFC has not disclosed this figure for 1QFY10.
  • Higher returns on investments lead to 47% YoY growth in other income
  • Net profit grows by 21% YoY in 1QFY10.
  • Capital adequacy at 15%; Gross NPA levels remain at 1% at the end of 1QFY10.

Standalone numbers
Rs (m) 1QFY09 1QFY10 Change
Interest income 20,900 25,131 20.2%
Interest expense 15,572 19,508 25.3%
Net Interest Income 5,328 5,623 5.5%
Net interest margin (%) 3.5% 3.8%  
Other Income 2,285 3,359 47.0%
Other Expense 1,015 1,063 4.7%
Provisions and contingencies 100 120 20.0%
Profit before tax 6,498 7,799 20.0%
Tax 1,817 2,150 18.3%
Effective tax rate 28.0% 27.6%  
Profit after tax/ (loss) 4,681 5,649 20.7%
Net profit margin (%) 22.4% 22.5%  
No. of shares (m)   284.6  
Book value per share (Rs)*   480.9  
P/BV (x)   4.9  
* (Book value as on 30th June 2009)

What has driven performance in 1QFY10?
  • Despite relatively muted growth in loan book due to stiff competition against PSU and private sector banks that got very aggressive in their home loan offerings, HDFC has managed to start the current fiscal on a comfortable note thanks to impressive net interest margins. While competing with the banks in terms of borrowing costs and passing on the same to its customers impacted the performance of HDFC in the earlier quarters, better pricing power has helped the institution improve its net interest margins (NIMs).

  • Signalling better future growth prospects, HDFC’s disbursements grew by 21% YoY, while the approvals have grown by 23% YoY in 1QFY10. A bulk of the loans continues to be lent to retail borrowers, particularly with ticket size below Rs 3 m. However, incremental lending during the past 12 months has been largely concentrated towards corporate borrowers.

    Cautious growth
    (Rs m) 1QFY09 % of total 1QFY10 % of total Change
    Approvals 99,960   122,590   22.6%
    Disbursements 72,040   86,880   20.6%
    Disbursement / approval ratio 72.1%   70.9%    
    Loans 773,271   870,458   12.6%
    Individuals 520,095 67.3% 548,538 63.0% 5.5%
    Corporates 234,278 30.3% 304,360 35.0% 29.9%
    Others 18,898 2.4% 17,560 2.0% -7.1%

  • HDFC’s other income grew by 47% YoY in 1QFY10 due to the increase in gains from surplus cash deployed with the mutual funds (grew 146% YoY). The institution also managed a healthy growth in its processing fee income.

  • HDFC’s gross NPAs (loans outstanding for more than 90 days) aggregated to 1% of the loan portfolio in 1QFY10 as against 1.1% in the corresponding period of the previous year. The balance in the provision for contingencies account was 0.8% of the loan portfolio in 1QFY10. HDFC’s capital adequacy ratio (CAR) stood at 15% (Tier I – 13.7%), as against the minimum requirement of 12%.

  • The unrealised gains on investment per share increased to Rs 410 at the end of 1QFY10 from Rs 257 at the end of 1QFY09.

What to expect?
At the current price of Rs 2,380, the stock is fairly priced at 3.2 times our estimated FY11 consolidated adjusted book value. We believe that HDFC’s business model (sales through direct selling agents and arrangement with HDFC Bank) will enable it to sustain a low cost to income ratio and enjoy operating leverage. While the institution’s NIMs continue to remain impressive, it needs to manage its competition with banks in terms of loan growth more efficiently. While the rate of growth in advances may remain moderated in the medium term, the institution faces minimal risks in terms of capital and quality of assets. We maintain our positive view on the stock.

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