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HDFC: Feeling the heat of poor demand - Views on News from Equitymaster

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HDFC: Feeling the heat of poor demand

Oct 12, 2009

Performance summary
  • Interest income grows 14% YoY in 1HFY10 on the back of 10% YoY growth in advances
  • Net interest margin drops to 3.4% in 1HFY10, from 3.6% in 1HFY09.
  • Cash surpluses and profit on sale of investments help the exponential growth in other income.
  • Net profit grows due to lower provisioning and controlled operating expenses.
  • Capital adequacy and net NPAs stand at 14.9% and 1% respectively at the end of 1HFY10.

(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Interest income 25,925 27,835 7.4% 49,060 55,764 13.7%
Interest Expense 17,572 18,365 4.5% 33,258 37,993 14.2%
Net Interest Income 8,353 9,470 13.4% 15,802 17,771 12.5%
Net interest margin       3.6% 3.4%  
Other Income 281 667 137.4% 332 1,229 270.2%
Other Expense 991 962 -2.9% 1,777 1,811 1.9%
Provisions and contingencies 43 45 4.7% 260 260 0.0%
Profit before tax 7,600 9,130 20.1% 14,097 16,929 20.1%
Tax 2,257 2,490 10.3% 4,076 4,640 13.8%
Effective tax rate 29.7% 27.3%   28.9% 27.4%  
Profit after tax/ (loss) 5,343 6,640 24.3% 10,021 12,289 22.6%
Net profit margin (%) 20.6% 23.9%   20.4% 22.0%  
No. of shares (m)       271.5 284.9  
Book value per share (Rs)*         513.9  
P/BV (x)         5.4  
* Standalone book value as on 30th September 2009

What has driven performance in 1HFY10?
  • Despite the relaxed interest rates on home loans during the past 6 to 9 months, the same failed to show any substantial impact on HDFC’s loan book as the same grew at a muted pace (up 10% YoY) in 1HFY10 While the approvals have grown by 18% YoY, the disbursal to sanction ratio improved to 79% from 74% in 1HFY09. Having said that HDFC remains unscathed from the subprime mortgage woes that lenders across the world are bearing the brunt of.

    Loan book break up…
    (Rs m) 1HFY09  1HFY10 Change
    Approvals 241,800 284,180 17.5%
    Disbursements 177,880 223,420 25.6%
    D/A ratio 74% 79%  
    Individuals 547,276 570,675 4.3%
    % of total 66.9% 67.3%  
    Corporate Bodies 245,093 308,354 25.8%
    % of total 30.8% 30.3%  
    Others 19,549 16,158 -17.3%
    % of total 2.3% 2.4%  
    Total loans 811,918 895,187 10.3%

  • HDFC’s other operating income grew by 270% YoY in 1HFY10 due to the income from sale of investments. The same may, however, not be sustainable going forward.

  • HDFC’s gross NPAs (loans outstanding for more than 90 days) aggregated to 0.95% of the loan portfolio in 1HFY10 as against 1.04% in the corresponding period of the previous year. The balance in the provision for contingencies account was is 1.9 times the regulatory requirement as stipulated by the National Housing Bank.

  • HDFC’s capital adequacy ratio (CAR) stood at 14.9%, as against the minimum requirement of 12%.

  • At the end of September 2009 the unrealised gains on HDFC’s listed investments amounted to Rs 467 per share as against Rs 317 per share at the end of September 2008.

What to expect?
At the current price of Rs 2,758, the stock is trading at 4.7 times our estimated FY12 consolidated adjusted book value. HDFC’s unique 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. The management has indicated that the timely re-pricing of loans will ensure that its spreads are protected. We, however, do envisage the advance growth to remain muted in the near term. We maintain our positive view on the stock.

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