HDFC, the leading housing finance company in the country, has announced its September quarter results. The company continues to post healthy growth in its bottomline on the back of strong improvement in net interest income as well as improvement in operating margins. Topline growth also continues to remain healthy.
Income from Operations
Net interest income
Operating Profit Margin (%)
Provisions for contingencies
Profit before Tax
Profit after Tax/(Loss)
Net Profit Margin (%)
No. of Shares (m)
Diluted Earnings per share* (Rs)
P/E Ratio (x)
India's largest housing finance company
HDFC is the largest housing finance company in the country with an incremental market share of over 20%. After venturing successfully into commercial banking, the company has set its sight on dominating the mutual fund and insurance areas. The company has recently entered in to an agreement with its associate, HDFC Bank, to retail its products from the latter's branch network. This will go a long way in further extending the reach of HDFC across the country.
What has driven the performance in 1QFY05?
Advances drive topline growth: Growth in HDFC's 2QFY05 topline is seemingly due to robust growth in advances (27% YoY). We believe that interest rates on home loans may have bottomed out and due to lack of a fall in the same, the topline growth is progressively improving. In the short-term, this growth is likely to be maintained considering the expertise and track record of HDFC. Also, considering that the housing finance industry is growing at a strong rate of 25%-30% per annum, large players like HDFC are likely to maintain their growth momentum.
Low interest expenses aid margins: HDFC has managed to keep a check on its interest expenses thus leading to a strong growth in net interest income. However, while the company has not disclosed its cost of deposits, we believe that it may have not been able to further improve the net interest margins that stood at 3.8% in FY04. HDFC continues to reduce its reliance on fixed deposits as a source of funding as they are marginally costlier than other sources like term loans and debentures. Due to its excellent credit rating, HDFC is able to garner funds at very low interest rates. What is commendable about the company's performance is the fact that it continues to improve upon its operating margins indicating that incremental business is being serviced at a very low cost. This may also be in part due to its alliance with HDFC Bank that has been retailing HDFC's products from its own branches. This agreement may have helped HDFC to further reduce its costs as far as acquiring incremental business is concerned.
Net interest income help profit growth: Significant growth in net interest income and better operating margins have led to another quarter of strong bottomline growth for HDFC. Due to its good asset quality (marginal zero net NPAs), the institution does not have to make large provisions for NPAs. Cost to income ratio has fallen further, indicating that the company is able to limit its client acquisition costs, which is also reflected in the improving operating margins.
What to expect?
The stock is currently trading at Rs 655, implying a price to adjusted book value multiple of 4.3 times. The company has done well to maintain its growth momentum over the last 2-3 years and even though its valuations seem stretched at the moment, they seem justified if one were to consider the combined value of the company taking into consideration its various other arms (insurance, banking and asset management). The company continues to meet investor expectations at every step.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407