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Research meeting extracts: HDFC - Views on News from Equitymaster
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Research meeting extracts: HDFC
Sep 14, 2004

Background
HDFC is India's largest housing finance company enjoying strong brand equity and a market share of over 45%. The company has an excellent reach with 142 branches spread across the country and abroad. The group enjoys high credibility due to its trusted and proactive management. HDFC with its subsidiaries (HDFC Bank and HDFC Standard Life) has diversified in to businesses like insurance and banking. While competition from banks has eaten in to HDFC's market share, the company has held its ground by growing its advances portfolio (over 30% growth in FY03) at a better rate than the industry growth rate (between 25%-30%). HDFC, however has not restricted its ambitions to just housing finance. The company through its various subsidiaries and associates has entered in to new business areas like insurance, banking and asset management (mutual funds). In order to further augment its reach across the country the company has tied up with associate bank, HDFC Bank, so that its products can be sold from the banks' branches. This new initiative will ensure that HDFC is able to better manage competition in the Rs 300 bn housing finance industry.

Takeaways from the management meeting
Sector
The management has indicated that despite the rising interest rates, the impact on demand for housing loans would be minimal. They also expect the 10 yr G-Sec yield to stabilize at 6.25% indicating a further softening from the current level. The management has also indicated that we are not likely to witness a high interest rate regime like that witnessed in the late nineties due to lower inflation rate compared to that period. It has also indicated that due to the changing trends in consumer behaviour, for instance higher incidence of nuclear families as well as higher disposable income, demand for housing loans is likely to sustain over the long-term.

Further the company indicated that there is ample liquidity in the market for short-term funding at rates near the 5% mark. The company also indicated that it is increasingly becoming difficult to raise money in the international markets at a cheaper rate compared to earlier. This is due to rising interest rates in the global markets.

Company
The company indicated that it had adequate amount of cash as well as low cost borrowings for it to sustain lending operations for this year. Also since interest rates are not likely to rise significantly over the long-term, it will still be able to remain competitive. According to the company, due to the rise in interest rates, banks have been forced to hike lending rates on home loans for fixed loan products. Whereas floating rates have remained more or less untouched. This has made banks uncompetitive as far as the fixed home loan products are concerned. To an extent it is due to the asset liability mismatch carried by banks.

The company has a 30%-35% market share in the yearly disbursals of housing loans in the country. It has a floating to fixed loans ratio of 75%:25%. This indicates a better flexibility for the company during times of rising interest rates. The duration of its assets and liabilities are almost equal at about 4.5 year. The company is able to raise capital at around 5.5%, which is one of the lowest in the industry. The average loan size for the company is Rs 465,000 with an average duration of 13 years. The company financed nearly 250,000 dwelling units in FY04.

Regarding its subsidiaries and associate companies then company indicated that there are currently no plans to merge with HDFC Bank. There is a need to infuse a sum of Rs 800 m each year over the next 3-4 years in growing the insurance business of the company (HDFC Standard Life). HDFC is mandated by regulations to reduce its stake in its associate company Credit Information Bureau of Indian Limited (CIBIL) to 10% from 40%.

Our outlook
Over the years, HDFC has emerged as one of the most successful housing finance companies in the country with a nationwide presence, popular brand name and sound asset quality. However, increasing competition from the banking sector has led to erosion in the company's market share. Considering that the company has still managed to hold ground in the face of competition, we accord relatively higher valuations to HDFC, as compared to the banking sector, mainly due to the financial strength as well as its ability to manage growth in the face of competition.

However, we would like to reiterate the current price of the company is well above our target price for the current year. Much of the future growth too, seems factored in. At the same time, we would like to highlight the fact that the company has a substantial investment portfolio (including investments in HDFC Bank, insurance and asset management companies) and if the market value of the same is added to the networth it can substantially inflate the book value per share of the company. This could also impact our buy and sell limits. We are in the process of evolving a method of incorporating these aspects in our research model and would shortly update the buy and sell limits accordingly.

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Feb 26, 2018 09:27 AM

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