According to newspaper reports, the Housing Development Finance Corporation (HDFC) has witnessed a 40% increase in applications for housing loans from individuals in the first five months of the current year.
HDFC (FY99 Total Income Rs 17.5 bn) is the largest housing finance company in India with a 55% market share. HDFC operates 41 offices and has a field force of more than 42,000 commission agents who mobilize retail deposits.
This information, disclosed by Mr. Deepak Parekh, chairman, is likely to lend more credence to the view that the economic recovery is gaining momentum. The surge in production of cement and finished steel has further endorsed this view.
The surge in loan requests has come at a time when HDFC has recorded a fall in net profit margins from 20.4% in FY98 to 19.1% in FY99. An increase in the volume of business will help the financial institution in increasing its profit margins, mainly as a result of increasing operational economies.
Another development pertains to the increasing amount of individual business (75%) as compared to corporate business. This will help HDFC in a number of ways. Firstly, the institution will generally be able to earn higher margins as compared to margins on loans to corporate sector. Also, more importantly, an increase in retail business will provide the institution with a larger captive market for selling its retail products. HDFC has decided to offer loans for cars and consumer durables as a first step towards increasing its dominance in the retail market.
However, the uncertainity pertaining to the sustainability of the economic recovery continues to be a source of concern. Moreover, with the competition in the housing loan market hotting up, the company's decision to diversify could lead to a loss of market share in its main business activity. Also, the company's decision to enter the car and consumer durable loans market could lead to a thinning of margins as competition in this segment is very intense.
The stock has always been a favorite of analysts and fund managers as it has an excellent asset quality and a good management. The FIIs have already exhausted their 30% investment limit in the company.
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