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HDFC: Core income performance disappoints
Oct 21, 2013

HDFC declared its results for the second quarter of the financial year 2013-14 (FY14). The institution has reported a 11% YoY growth in net interest income while net profits have grown on similar lines at 10% YoY during 2QFY14. The profits for 2QFY14 and 1HFY14 grew 10% and 13% YoY respectively. Here is our analysis of the results.

Performance summary
  • The net interest income grows 11% YoY in 2QFY14 on the back of 19% YoY growth in total loan book. Of the total loan book, individual loans comprised of 70%.
  • Net interest margin falls from 4.2% in 2QFY13 to 4.1% in 2QFY14.
  • Other income dropped for another quarter in a row by 7% YoY in 2QFY14
  • Net profit grows by 10% YoY for 2QFY14 which was almost in line with the increase in net interest income. Lower provisions boosted the profits for the quarter.
  • Capital adequacy ratio and gross NPAs stand at 19% and 0.8% respectively at the end of September 2013.
  • The company reported a healthy RoE of 22% during the quarter.

Standalone financials
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Interest income  51,753 58,592 13.2% 97,360 110,285 13.3%
Interest Expense 35,414 40,457 14.2% 69,296 78,090 12.7%
Net Interest Income 16,339 18,135 11.0% 28,064 32,195 14.7%
Net interest margin       4.2% 4.1%  
Other Income  1,019 948 -6.9% 4,835 4,904 1.4%
Other Expense  1,477  1,720 16.5% 2,819 3,355 19.0%
Provisions and contingencies 400 150 -62.5%  800  450 -43.8%
Profit before tax 15,481 17,213 11.2% 29,280 33,294 13.7%
Tax  3,970  4,550 14.6% 7,750 8,900 14.8%
Effective tax rate 25.6% 26.4%   26.5% 26.7% 108.2%
Profit after tax/ (loss) 11,511 12,663 10.0% 21,530 24,394 13.3%
Net profit margin (%) 22.2% 21.6%   22.1% 22.1%  
No. of shares (m)         1558.0  
Book value per share (Rs)*         178.2  
P/BV (x)          4.6  
* (Standalone book value as on 30th September 2013)

What has driven performance in 2QFY14?
  • Despite recording robust credit growth for the quarter, the net interest income for HDFC Ltd failed to make a mark. The contraction in margins too led to the fall in the net interest income growth for the company. Consequently, the operating profits for the quarter were hurt. This was quite largely offset by decrease in provisioning costs that enabled the company to put up modest 10% YoY growth in profitability.

  • The robust loan growth despite the economic turbulences is definitely a feather in the cap of HDFC Ltd. The loan book at Rs 1.84 lakh crores grew by 19% YoY driven by the salaried class. The growth largely came from the individual loan portfolio that contributed almost 70% to the total portfolio and grew at whopping 26% YoY despite the tough environs. HDFC Ltd’s average loan size remains at Rs 21.9 lakh in the residential segment. The company expects to grow its loan book in the region of 18-20% in the foreseeable future.
    Loan book composition…
    (Rs m) 2QFY13  2QFY14 Change
    Loans
    Individuals 994,010 1,247,490 25.5%
    % of total 64.1% 67.5%  
    Corporate Bodies 537,630  580,630 8.0%
    % of total 34.7% 31.4%  
    Others 19,640 20,740 5.6%
    % of total 1.3% 1.1%  
    Total loans   1,551,280 1,848,860 19.2%

  • However, the core income performance turned out to be a disappointment coming from the HDFC Ltd. The increased interest expenditure during September quarter emerged due to the greater reliance on bank borrowings rather than bonds. As a result, the net interest income grew by modest 11% YoY during 2Q. The margins for the quarter witnessed a decline of 0.1% YoY and were clocked at 4.1%. That said, the company is confident to maintain 4%+ margins going forward, while maintaining spreads at 2.3% levels.

  • Continuing with the trend in June quarter, the other income reported de-growth even for the 2QFY14. It declined by 7% YoY for the quarter and grew merely by 1% for 1HFY14. Lack of investment gains led to the fall.

  • The September quarter witnessed marginal deterioration in asset quality of HDFC Ltd; while the provisioning costs came down. The company’s gross NPAs increased to 0.79% as against 0.77% reported a year ago. The increase in NPAs was on account of one single exposure to realty firm to the tune of Rs 5 bn.. That said, the institution stands confident over the recoveries from the project given the adequate collateral. The provisions for the quarter declined by huge percentage of almost 63% YoY

  • The dual effect of robust loan growth and lower provisions enabled HDFC Ltd to report modest profit growth of 10% YoY in 2QFY14. The cost-income ratio of HDFC Ltd stands as one of the lowest in the industry. The company reported 9% as the cost-income ratio for 2QFY14. However, the operating expenses stood higher, reporting 17% YoY growth during 2QFY14.

  • The capital adequacy for HDFC Ltd has gone up as high as 19%, as against the minimum requirement of 12%. The core Tier I stood at healthy 16.5% during 2Q.

What to expect?
At the current price of Rs 815, the stock is trading at 4.6 times standalone book value. There is no denying the fact that the balance sheet strength of HDFC Ltd stands pretty resilient and robust. The gross NPAs at 0.8% remain one of the best in housing finance. However, the core income performance and the contraction in spreads came as a disappointment. That said, the residential segment portfolio for HDFC Ltd is one of the best performing portfolios in the industry and continues to grow even in challenging times. The stock has gone up since we recommended Buy on it in August 2013. At current valuations, we recommend investors having the stock in their portfolio to hold on to it.

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