India’s No. 1 housing finance company, Housing Development Finance Corporation (HDFC), is in the thick of things, literally speaking. The company commands a market share of over 60% in the housing finance sector. Leveraging on its brand equity HDFC has also entered the Indian Mutual Fund scene quite recently. HDFC was the only applicant to be given clearance by the government, to enter the Rs 250 bn life insurance business. This in itself speaks volumes about the management’s professional reputation.
Financial year 2000 proved to be a boon for housing finance companies, as the tax benefits announced in the budget, coupled with the low real estate prices and rising disposable incomes, spurred housing demand. As a result, demand for housing finance too has registered high rates of growth. The housing sector has now been recognized as an engine of economic growth and HDFC is well placed to capitalise on this surge in demand.
Against this backdrop, HDFC logged in an excellent performance. The company’s approvals and disbursements during the first half of financial year 2001 witnessed a year on year growth of 33% and 32% respectively. The robust growth in itself is a conclusion that HDFC’s business is far less susceptible to any economy downturn.
% change compared to corresponding previous period
The entry of new players has not in any way significantly reduced HDFC’s domination in terms of volume. However, the increased competition has led to a decline in interest spread (the difference between interest income earned and interest paid). Over the last couple of years HDFC’s spread has shrunk from 2.1% in financial year 1997 to 1.8% in financial year 2000. When it comes to containing risk, the company’s track record is among the best in the financial sector. During the financial year 2000, HDFC has reduced the quantum of loans where payment was in arrears to just 0.9% of its portfolio. This is because individuals account for nearly 70% of its total outstanding loans. The high level of an individual investor’s personal contribution in a house makes the possibility of default less likely.
In keeping with its tradition of playing safe, HDFC is diversifying its business. The company has chosen the acquisition route to increase its assets and customer base in its core business of housing finance. Its recent acquisition of Home Trust Housing Finance and Gruh Finance will not only increase its size but will also bring the economies of scale.
Apart from these traditional methods of growing, HDFC is also leveraging the Internet to consolidate its business. It has picked up a stake in various portals. These are pure investments to draw synergies for its existing businesses. Its proposed venture with TCS for setting up call centres can potentially provide HDFC with strong revenue streams. The venture is aimed at cornering a share of $10 bn IT (information technology) enabled services market where India has a significant cost advantage. While its investments in new business may not yield immediate returns, they are likely to enhance HDFC’s returns on equity over the medium term. It will also help in expanding its customer base and provide more credence to its cross-selling efforts.
HDFC derives an edge in all its forays because of its wide reaching marketing and distribution network (over 44,000 agents). Once it has the entire range of products (post insurance), the company has plans to enter into distribution of financial products by leveraging its own as well as the network of HDFC Bank. The company can leverage its existing channels to provide the products and services in the areas of Infotech services, asset management, life insurance and commercial banking. This over a longer time frame can emerge as a major source of revenue for the company.
The company’s proactivity and brand name, has always accorded it premium valuations on the bourses. But the evidence of increasing competition (from SBI and ICICI) may lead to slow down in its growth, in turn affecting its current valuations. Nevertheless, if its investments in new ventures like call centres, mutual funds, insurance and Internet initiatives click, then HDFC looks set for higher growth and hence, valuations. Also one should not ignore the value of its 27% stake in HDFC Bank (India’s No. 1 private sector bank), which will pay rich dividends to the company.
The near term concerns however, are centered on its diversifications. It is not easy for the company to dominate its other new businesses, as it has done in housing finance. With its entry into the insurance sector in association with Standard Life of the UK, the growth from other income may slowdown, as the insurance business requires long gestation period and large investments. Lower than anticipated returns could also worry its investors.