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HDFC: Under control - Views on News from Equitymaster
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  • Oct 17, 2002

    HDFC: Under control

    Housing Development Finance Corporation Ltd. (HDFC), which reported slight decline in topline growth during the first quarter has seen second quarter numbers come in higher. Operating profits have increased by 30%, which has lifted pre-tax earnings.

    (Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
    Income from operations 6,474 7,369 13.8% 12,578 14,178 12.7%
    Other Income 260 254 -2.3% 496 483 -2.5%
    Interest expense 4,725 5,143 8.9% 9,348 10,119 8.2%
    Net interest income 1,749 2,226 27.2% 3,229 4,059 25.7%
    Other expenses 310 344 10.7% 665 718 8.0%
    Operating Profit 1,439 1,882 30.8% 2,564 3,341 30.3%
    Operating Profit Margin (%) 22.2% 25.5%   20.4% 23.6%  
    Provisions and contingencies 30 40 33.3% 60 70 16.7%
    Profit before Tax 1,669 2,096 25.6% 3,000 3,754 25.1%
    Tax 284 424 49.6% 475 710 49.5%
    Profit after Tax/(Loss) 1,385 1,672 20.7% 2,526 3,045 20.6%
    Net profit margin (%) 21.4% 22.7%   20.1% 21.5%  
    No. of Shares (m) 120.3 121.9   120.3 121.9  
    Diluted Earnings per share* 45.5 54.9   41.4 50.0  
    P/E Ratio         12.3  

    Housing finance -- part of financial services industry -- is experiencing a boom with stable realty prices, tax incentives by Government, softer interest rates and rising income levels. However, with higher growth, the competitive landscape has been dotted by several players, especially commercial banks. Markets did fear the effect of competition to reflect on company operating margins. But HDFC has been able to keep operating performance under control.

    Similar to first quarter, HDFC reported 30% YoY rise in approvals while disbursements in 2Q seem to have grown at a faster rate compared to last quarter. The retail segment continues to register high 30% growth. Interest income representing 77% of operating income has grown by a respectable 15% YoY. Key expense head, interest cost has increased by only 7.6%, which has led to the jump in net interest income & operating margins. Average cost of funds for six months ended September '02 has declined to 9.7% from 11.2% last year. The deposit base rose by 21% to Rs 100.8 bn, which could have contributed to decline in interest cost. Also, the company has maintained vigil over other operating expenses. The cost to income ratio declined to 15.8% from 17.8% in 1HFY02 and is even lower for 2QFY03.

    In our earlier report, we mentioned that HDFC has entered into joint venture with Chubb Corp, US for general insurance. HDFC will hold 74% equity in the JV company and the balance will be with Chubb. The JV received the approval on July 18, 2002 from IRDA and plans to begin operations by September 2002. A 1:1 bonus issue proposal has been approved by the board. Through extra-ordinary general meeting, the company plans to get the proposal approved by shareholders. Consequently, share capital is likely to stand increased to Rs 2.4 bn. The company is also considering a buyback of equity shares subject to receipt of all regulatory approvals. As per Companies Act, a company cannot affect a buyback if debt/equity ratio exceeds 2:1. With regulatory approval pending, details of the re-purchase offer are yet to be chalked out.

    At Rs 616 the scrip is trading on a multiple of 12.3x 2QFY03 annualised earnings. Despite strong performance, the scrip declined in today's trading session. The stock has been rising consistently over the past month from Rs 570 levels, which could be due to expectations of good performance. Consequently, the stock is likely to have seen profit booking. As mentioned earlier, competition is intensifying, which could affect operating performance. Interest rates are stable as against the sharp decline over the past 18 months, which cushioned interest spreads. Over the short to medium term, the company could experience a challenging environment.



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