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HDFC Bank: Operating margins dip - Views on News from Equitymaster
 
 
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  • Jul 31, 2001

    HDFC Bank: Operating margins dip

    HDFC Bank has maintained its growth trajectory by reporting a 34% jump in earnings for the June quarter. The bank's interest income has also witnessed an encouraging growth of 39%.

    (Rs m) 1QFY01 1QFY02 Change
    Interest Income 2,786 3,882 39.4%
    Other Income 442 673 52.2%
    Interest Expenditure 1,571 2,480 57.8%
    Operating Profit (EBDIT) 1,214 1,402 15.5%
    Operating Profit Margin (%) 43.6% 36.1%  
    Other Expenditure 963 935 -2.8%
    Profit before Tax 694 1,139 64.3%
    Provisions & contingencies - 236  
    Tax 230 283 22.9%
    Profit after Tax/(Loss) 464 620 33.8%
    Net profit margin (%) 16.6% 16.0%  
    No. of Shares (eoy) 243.3 243.6  
    Diluted Earnings per share* 7.6 10.2  
    P/E (at current price)   23  
    *(annualised)      

    However, the bank's operating margins have gone down by significant 750 basis points to 36%. Nevertheless, they are the highest in the banking sector. With increasing challenges in the banking sector, it will be difficult for the bank to sustain high operating margins.

    During the quarter, HDFC Bank's other income recorded a growth of over 50% and accounted for 15% of total income. Other income relates to non fund based activities including commission, fees, foreign exchange earnings and earnings from debt securities.

    Surprisingly, the bank's other expenses were lower by 3% in 1QFY02. Its cost to income ratio also declined to 45% (from 58% in 1QFY01). However, the ratio was in line with aggregate 45% in FY01.

    HDFC Bank has provided Rs 236 m in the current quarter as provisions for non-performing assets (NPAs). The bank's NPA coverage ratio of 86% is the highest in the banking sector, reflecting the transparency of its accounts.

    During the quarter, the bank raised US$ 173 m through an ADS issue and listed its stock on the NYSE. Consequent to this issue, the capital adequacy ratio will exceed 16% from the current 10%.

    At the current price of Rs 234 HDFC Bank is trading at a P/E of 20x FY02 projected earnings. Its Price/Book value ratio of 3x (after considering ADS issue) is comparatively higher than its peers. We have projected about 40% growth in the bank's earnings for FY02. The bank's increased capital base is likely to support its rapid growth in future. Considering the high management quality and earnings growth, the bank is likely to get premium valuations.

     

     

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