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HDFC: Retaining cost advantage
Oct 18, 2010

HDFC declared its 2QFY11 results. The institution has reported a 4.4% growth in interest income while net profits have grown by 22% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Interest income grows 2.3% YoY in 1HFY11 on the back of 19% YoY growth in advances.
  • Net interest margin improves by 0.6% to 4% in 1HFY11 from 3.4% in 1HFY10.
  • Other income falls as there were fewer profits booked on sale of investments compared to last year
  • Net profit grows by 22% YoY mainly due to lower interest expense. Profit margin also improves to 26.3%.
  • Capital adequacy and net NPAs stand at 14.1% and 0.2% respectively at the end of 2QFY11.


Standalone numbers
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Interest income       27,835      29,066 4.4%       55,764       57,037 2.3%
Interest Expense      18,365      17,176 -6.5%       37,993       34,371 -9.5%
Net Interest Income       9,470      11,890 25.6%       17,771       22,665 27.5%
Net interest margin       3.4% 4.0%  
Other Income          667          637 -4.5%         1,229            685 -44.3%
Other Expense          963       1,147 19.1%         1,987         2,265 14.0%
Provisions and contingencies            45            44 -1.1% 84 84 -0.1%
Profit before tax 9,129 11,335 24.2% 16,929 21,001 24.1%
Tax 2,490 3,260 30.9% 4,640 5,980 28.9%
Effective tax rate 27.3% 28.8%   27.4% 28.5%  
Profit after tax/ (loss) 6,639 8,075 21.6% 12,289 15,021 22.2%
Net profit margin (%) 23.9% 27.8%   22.0% 26.3%  
No. of shares (m)     1,424.5 1460.1  
Book value per share (Rs)*         117.7  
P/BV (x)         6.2  
* (Standalone book value as on 30th September 2010)

What has driven performance in 1HFY11?
  • HDFC's loan book grew at a strong pace (up 19% YoY) in 1HFY11. Inclusive of loans sold (securitized), the growth clocked was 24%. While approvals grew by 29% YoY the disbursals grew by 27% YoY. Despite robust loan growth, the company saw a 2.3% increase in interest income during the first half. The quarterly performance was better with the company seeing a 4.4% YoY increase in interest income in 2QFY11. This increase was despite the ‘dual-rates' scheme in home loans continuing for the long haul. The lower cost of funds helped the entity retain higher net interest margins.

    Loan book break up…
    (Rs m) 1HFY10 1HFY11 Change
    Loans      
    Individuals 570,676 682,635 19.6%
    % of total 63.7% 64.2%  
    Corporate Bodies 308,354 365,226 18.4%
    % of total 34.4% 34.4%  
    Others 16,159 15,014 -7.1%
    % of total 1.8% 1.4%  
    Total loans 895,189 1,062,875 18.7%

  • HDFC's other income fell by 44% in 1HFY11. This quarter there were lower profits booked from the sale of investments which were significant in 1HFY10.

  • HDFC's gross NPAs (loans outstanding for more than 90 days) aggregated to 0.86% of the loan portfolio in 1HFY11 (0.95% previously). The balance in the provision for contingencies account is 0.7% of the overall loan portfolio.

  • HDFC's capital adequacy ratio (CAR) stood at 14.1%, as against the minimum requirement of 12%, ensuring sufficient capital to grow in the medium term without any equity dilution.

  • In the recent quarter, the company completed its first stock split in over a decade, by subdividing the face value of its equity shares from Rs 10 per share to Rs 2 per share.

  • At the end of September 2010 the unrealised gains on HDFC's listed investments amounted to Rs 159 per share as against Rs 93.4 per share at the end of September 2009.

  • During the quarter, the company acquired 11 m equity shares of Credila Financial Services Pvt. Ltd, a specialist education loan provider. Post the acquisition, HDFC now holds 62.3% of the equity capital of Credila, making it a a subsidiary of the company.

What to expect?
At the current price of Rs 728, the stock is trading at 4.6 times our estimated FY13 consolidated adjusted book value. Research Pro subscribers can view our latest update on the company. HDFC's loan growth is slightly higher than our estimates, while profitability is in line with our estimates. The company has also raised Rs 68 bn through private placement of non-convertible debentures (NCDs) during the first half of the current financial year, gearing it up for advance growth. Having said that, lack of pricing power due to competition with banks is a concern. The stock's valuations at the current levels warrant caution.

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