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HDFC Bank: Mr Dependable

Jul 14, 2003

HDFC Bank has reported its June quarter results that are more or less in line with expectations. The bank has witnessed a strong 22% YoY growth in topline which has led to an even stronger 30% growth in its bottomline in the same period. Bottomline growth has also been aided by other income. Favorable interest rate scenario has helped the bank bring down interest expenses. This in turn, has led to an improvement in operating margins. The bank continues to show consistency in its performance.

(Rs m)1QFY031QFY04Change
Income from operations 4,792 5,845 22.0%
Other Income 813 1,327 63.2%
Interest expense 2,907 2,994 3.0%
Net interest income 1,885 2,851 51.2%
Other expenses 1,202 1,935 61.0%
Operating Profit 683 915 34.0%
Operating Profit Margin (%)14.3%15.7%
Provisions and contingencies 346 66592.1%
Profit before Tax 1,150 1,57837.2%
Tax 326 50554.9%
Profit after Tax/(Loss) 824 1,07330.2%
Net profit margin (%)17.2%18.4%
No. of Shares (m) 281.4 283.2
Diluted Earnings per share (Rs)*11.615.2
P/E Ratio (x)18.7
*(annualised)

As has been seen before, HDFC Bank's strong performance in the June quarter is the result of strong growth in the advances. While overall advances (customer assets) of the company have risen by a strong 43% YoY, retail advances have grown at a faster rate of 133% in the same period. Retail assets account for 31% (22% in June quarter last year) of total advances currently. For FY04, we have assumed an advances growth of 35% for HDFC Bank.

There has been a significant improvement in the bank's net interest margin in the June quarter. Going forward, further improvement in net interest margins looks difficult. With competition increasing manifold and interest rate on loans showing a decline, margins could come under pressure.

The bank has managed to improve its operating margins. A hallmark of HDFC Bank's performance over the years has been its low NPA levels. At the end of June quarter, Net NPA to advances ratio stood at 0.3%. This has been achieved by strong provisioning during the quarter. We have assumed net NPAs to advances ratio of 0.2% for the bank in FY04.

At the current market price of Rs 284, HDFC Bank is trading at a P/E multiple of 18x its annualised 1QFY04 earnings. The bank has historically traded at a premium compared to private sector peers in light of its high productivity ratios and good asset quality. While growth prospects are promising, much of it already seems to be reflected in current valuations.

HDFC Bank's stock has run up in the recent past due to speculation of a possible take over of UTI Bank. However, both the banks' have denied the same.

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