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HDFC: 全helter段ng growth - Views on News from Equitymaster
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  • Dec 31, 2004

    HDFC: 全helter段ng growth

    Considering the shortage of 19.4 m dwelling units and an estimated outlay of Rs 7,200 bn by 2007 for the housing sector (as per the Tenth Plan), the housing finance market is certainly on the springboard for a giant leap. Thanks to the burgeoning middle class population and government痴 generosity regarding 蘇ousing loan tax sops, home loan finance is here to stay. The following graph gives a snapshot of the growth in housing finance industry over the last few years.

    HDFC, India痴 largest housing finance company, with its strong brand equity and a market share of over 40%, has an extensive reach with 180 branches spread across the country and abroad. The group enjoys high credibility due to its trusted and proactive management. HDFC痴 strength over the years has been its core business of housing loans. This strength has come about with the management痴 dedicated focus.

    Over the years, HDFC has emerged as a financial conglomerate by not restricting its ambitions to just housing finance. The company through its various subsidiaries and associates has ventured in to new businesses like insurance, banking and asset management (mutual funds). In order to further augment its reach across the country the company has tied up with associate bank, HDFC Bank, so that its products can be sold from the banks branches. This new initiative has ensured that HDFC is able to manage competition in the Rs 300 bn housing finance industry.

    While competition from banks have eaten into its market share, the company has held its ground by growing its advances portfolio (over 27% growth in FY04) at a better rate than the industry growth rate of approximately 25%. Till 1HFY05, HDFC had disbursed housing loans to the tune of Rs 632 bn and financed 2.5 m housing units. This is supported by a capital adequacy ratio of 14.7%, of which 13.3% is Tier I capital.

    Performance review of the company.

    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. 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. This could also be attributed to its alliance with HDFC Bank that has been retailing HDFC's products from its own branches. This agreement has helped HDFC to further reduce its costs as far as acquiring incremental business is concerned. The company has shown an unparalleled efficiency in terms of reducing its cost to income ratio over the last decade. Due to this, despite competition and fall in returns, the company has sustained a reasonable growth in its spread (CAGR of 22% over the last 4 years).

    Healthy quality of assets: The quality of HDFC's loan portfolio is excellent, with net non-performing loans at just 0.1% of total loan portfolio. The company advances loans up to 85% of the value of the property and most of its loans are to individuals. It retains the legal rights to the property till the loans are repaid. Thus it has a large margin of safety, as the company can sell off the property and recover the dues in case the loans go bad. This is coupled with a coverage ratio (provisions to net NPAs) of 133%.

    Losing market share: The housing finance market has become very competitive with the entry of new players, including behemoths like ICICI and SBI. HDFC痴 market share has already come down to just over 22% (of incremental lending) in FY04 from over 50% five years back. With banks cashing on the retail boom, the company痴 share is expected to come down further.

    At the current price of Rs 759, the company is trading at a price to book value ratio of 5.5 times. This puts it at the higher end of valuations as compared to its closest competitor LIC Housing Finance (Price / Book value 1.6 times). Given the fact that the new age competitors for the company happen to be banks, which have access to cheaper cost funds, the growth sustainability of the company remains a subject of concern but its strength in asset management and insurance are being looked at as long term growth engines.



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