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HDFC, ICICI: Valuation story - Views on News from Equitymaster
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  • Dec 5, 2000

    HDFC, ICICI: Valuation story

    HDFC, India’s largest housing finance company has always been traded at a premium compared to its peers. This is due to its size, brand and quality of earnings. HDFC enjoys a market share of over 60% in the housing finance sector with an excellent reach of 67 branches spread across the country.

    On the other hand ICICI, one of the largest financial institutions in India has been accorded lower valuations by the markets due to concern over its quality of assets. In the past three years ICICI’s sales grew at a compounded annual growth rate (CAGR) of 21% (HDFC’s at 18%) but profits grew by a CAGR of marginal 5% (HDFC’s at 17%). The lower growth in profits was on account of a CAGR of 46% in provisions and contingencies on assets and investments.

    HDFC has comparatively better productivity ratios than ICICI. Although, ICICI’s revenues per employee and net profit per employee are higher, it is lagging behind in other parameters.

    Productivity Parameters
    (Rs m) HDFC ICICI
    Revenues per employee 23.4 83.3
    Profits per employee 4.7 11.9
    Deposits/employee 72.3 49.8
    Deposits/branch 928.9 669.9
    Employees/branch (Nos.) 12.9 13.5
    Profit margin/employee 20.0% 14.3%

    In terms of returns also HDFC is way ahead of ICICI. This is mainly due to low non-performing assets (NPAs) to advances ratio. The quality of HDFC's loan portfolio is excellent, with NPAs at just 0.9% of total loan portfolio. The company advances loan up to 85% of the value of the property. However, due to the cash component that invariably exists in such deals, the effective loan component is significantly lower (expressed as a percentage of the market value of the property). It thus has a large margin of safety in case the loans turn bad.

    ICICI derives more than 60% of its net profits from manufacturing and project financing, which has a high level of NPAs, and, therefore, lower returns. ICICI carries on its books a large amount of non-performing loans. The gross non-performing loans stood at 11.5% in FY00. If the economy fails to improve, the NPAs will increase further, adversely affecting its financial performance. ICICI’s returns over the past few years are hit by high level of NPAs.

    Measure of Investments
    Particulars HDFC ICICI
    Return on assets 6.6% 2.1%
    Return on equity 19.2% 16.8%
    Return on capital 2.9% 2.0%
    Capital adequacy ratio 14.1% 17.2%
    Net NPAs as a % of advances 0.9% 7.6%

    ICICI’s sustained marketing efforts, innovative structured products and continued focus on key industry sectors could drive its future growth. Further, reshuffling its portfolio from manufacturing projects to corporate finance is expected to bring down its level of NPAs in future. This could trigger a re-rating in the stock.

    HDFC, has historically enjoyed a premium valuations (P/E in the range of 10-15 times) compared to ICICI (P/E in the range of 5-10 times), as a result of its focussed foray into housing finance. On the other hand ICICI is a diversified financial institution having interests right from retail to corporate and project to housing finance coupled with its Internet initiatives.

    However, with HDFC expanding its wings through foray into technology, mutual funds, insurance as also through acquisitions, its folio will become diversified too. How it manages to generate incremental returns from these new forays will drive its future valuations.

    Comparative Valuation
    Particulars HDFC ICICI
    Market price (Rs.) 525.0 94.0
    Market cap / Operating income (x) 2.6 0.8
    Price / Book value (x) 2.6 0.7
    Price / Earnings (x) 13.3 6.1



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