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.
4 yrs CAGR
Income from operations
Profits before tax
Profits after tax
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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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