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HDFC: Marching ahead

Dec 19, 2000

India’s premier housing finance company, HDFC is in a transformation phase. The focus of the company is gradually shifting from mortgage to other areas of financial markets. Its new ventures in IT service, life insurance, asset management and commercial banking are expected to contribute more than 40% of its revenues over the next five years. HDFC has shown satisfactory financial performance over the past four years. Its operating income increased at a compounded annual growth rate (CAGR) of 19% and net profits at a CAGR of 18%. Also the sanctions and disbursement witnessed an impressive growth of 30% in the last four years.

Financial Overview
(Rs m) 1HFY98 1HFY99 1HFY00 1HFY01 4 yrs CAGR
Income from operations 6,841 8,385 9,327 11,384 18.5%
Operating profit 2,094 2,346 2,606 3,056 13.4%
Other expenses 314 327 380 481 15.2%
Depreciation 243 255 240 220 -3.3%
Profits before tax 1,556 1,778 1,995 2,398 15.5%
Tax 277 300 268 323 5.3%
Profits after tax 1,279 1,478 1,727 2,075 17.5%
No. of shares (m) 119 119 119 119  
Sanctions 14,203 18,694 23,710 31,651 30.6%
Disbursements 11,321 15,106 18,888 24,847 30.0%

Key Ratios
Particulars 1HFY98 1HFY99 1HFY00 1HFY01
Operating profit margins 30.6% 28.0% 27.9% 26.8%
Tax / PBT 17.8% 16.9% 13.4% 13.5%
NPM 18.6% 17.6% 18.5% 18.2%
EPS (Rs) 21.48 24.81 29.00 34.83

However, increasing competition in the housing finance market has resulted in declining operating profit margins over the years. With the entry of ICICI, nationalized banks and top non-banking finance companies the markets for housing finance has become more competitive. HDFC’s interest spread has shrunk from 2.06% in FY98 to 1.83% in FY00.

HDFC has traditionally deployed about 20% of its capital employed in investments other than housing loans. The return on other investments has provided a big chunk of income in the past few years. Its recent entry into the insurance sector in association with the Standard Life Assurance may affect the future growth of the other income, as the insurance business involves long payback period and large investments.

HDFC’s track record is best amongst the housing finance companies when it comes to containing risk. HDFC's recovery performance continues to be good. The gross non-performing loans of the corporation aggregated 1.2% of the total housing portfolio for the first half ended September 2000. Since all non-performing assets are fully provided for, the net non-performing assets are nil. This is a remarkable achievement! Low risk associated with its business and the high standard of services provided by it has played an important role in the relatively high valuations of the stock.

At the current market price of Rs 555, HDFC is trading at a P/E multiple of 14 times its FY01 projected earning. Its current Price/Book value ratio of 2.7 times is the highest in the past four years.

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