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HDFC: Competition ahead - Views on News from Equitymaster
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  • Oct 11, 2001

    HDFC: Competition ahead

    HDFC has maintained its financial performance since the last few quarters despite sluggish economic environment. This is due to buoyant growth in the housing finance market fueled by higher tax incentives given in the budget.

    The company is set to declare its second quarter results in the next week. During the first quarter, HDFC reported 25% jump in profits on a revenue growth of 15%. HDFC has continuously improved its operating margins by reducing its cost of funds. The company is planning to tap overseas market for raising around 100 m yen for lending purposes. The interest rate for the loan is estimated to be about 300 basis points lower than the domestic prime-lending rate. An important point to note here is that housing companies are exempted from paying withholding tax on foreign currency borrowings. ECB route recently suffered a blow due to imposition of withholding tax ranging from 10%-25%. Raising foreign currency loan would help HDFC in reducing its cost of funds further and increase interest spread.

    HDFC is expected to maintain its growth trajectory in the second quarter. With an improvement in operating margins and low depreciation charges, HDFC’s profits are projected to grow by over 18% in the second quarter.

    Financial snapshot
    (Rs m) 2QFY00 2QFY01 Change 2QFY02E Change
    Income from Operations 4,839 5,862 21.1% 6,741 15.0%
    Other Income 6 38 495.2% 10 -73.3%
    Total Income 4,845 5,899 21.8% 6,751 14.4%
    Interest Expense 3,434 4,211 22.6% 4,786 13.7%
    Operating profit 1,405 1,651 17.5% 1,955 18.4%
    Other Expenses 189 230 21.8% 257 11.5%
    Depreciation 120 112 -6.3% 101 -10.0%
    Profits Before Tax 1,102 1,346 22.1% 1,607 19.4%
    Tax 131 182 39.2% 225 23.4%
    Net Profits 971 1,164 19.8% 1,382 18.8%
    No. of shares (m) 119.1 119.1   119.1  

    Performance measures
    Particulars 2QFY00 2QFY01 2QFY02E
    OPM 29.0% 28.2% 29.0%
    Tax / PBT 11.9% 13.5% 14.0%
    NPM 20.0% 19.7% 20.5%
    Cash EPS (Rs) 36.6 42.9 49.8
    EPS (Rs) 32.6 39.1 46.4

    Although, the housing finance market is growing at a strong rate (20%), entry of banks and financial institutions in the industry has increased the pressure on yields in the business. HDFC's ability to maintain growth and margins amidst competition will be critical for its future performance.

    The company’s foray into the insurance and mutual fund businesses will provide diversity to its business profile in future. However, due to a longer gestation period and high degree of competition, the insurance business is not expected to breakeven before the next 5 years.

    At the current market price of Rs 672, HDFC is trading at a P/E of 13x and Price/Book value ratio of 3x FY02 consolidated projected earnings. It is one of the most valued stocks in the finance sector. Following the recent hike in the sectoral cap by the RBI to 100%, HDFC has raised FII limit to 74%. (As on March ’01, FIIs and FDI were cumulatively holding 64% in the company). This could technically generate demand for the stock considering its strong fundamentals.



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