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HDFC: Maintaining momentum

Jul 18, 2003

HDFC, the largest housing finance company in the country, has announced a 22% net profit growth in the June quarter. Topline growth has however disappointed, growing by a marginal 3% during the same period. Bottomline growth has been mainly aided by significant improvement in operating margins (up 420 basis points).

(Rs m)1QFY03 1QFY04Change
Income from Operations 7,029 7,259 3.3%
Other Income 10 17 81.3%
Interest Expenses 4,975 4,789 -3.7%
Net interest income 2,053 2,470 20.3%
Other Expenses 330 385 16.8%
Operating Profit 1,724 2,085 20.9%
Operating Profit Margin (%)24.5%28.7%
Provisions for contingencies 75 50-33.3%
Profit before Tax 1,658 2,052 23.7%
Tax 285 37431.2%
Profit after Tax/(Loss) 1,373 1,678 22.2%
Net Profit Margin (%)19.5%23.1%
No. of Shares (m) 121.7 244.4
Diluted Earnings per share* (Rs)22.527.5
P/E Ratio (x)14.8

Due to the strong demand for housing finance, HDFC's advances have grown strongly by 30%. However, this has not translated into topline growth as the yield on advances seems to have reduced significantly. Going forward, we believe that this is likely to keep the topline growth of the company subdued in FY04. The retail advances have grown by an encouraging 34% during the quarter, indicating the current trend in the housing finance market. In the last 3 years, HDFC has lost market share to agressive new entrants in the housing finance industry (from 60% to around 45% currently).

While topline growth of the company has remained rather subdued, HDFC continues to take measures to reduce costs. It has reduced its interest costs in 1QFY04, which has helped its net interest income grow by 20%. It has also taken on External Commercial Borrowings (ECB) to the tune of US$ 200 m recently to avail the benefits of lower interest rates prevailing in the international markets.

Due to these initiatives there has been a marked improvement in the operating margins of the company. They have improved by 420 basis points in the June quarter. We have estimated operating margins of close to 26% for HDFC in FY04. The company has indicated that it plans to set up 20-25 centers every year going forward, in a bid to increase its reach. But it will also mean higher expenses for the company in the form of higher employee and infrastructure costs. The margins may witness some downward correction in the initial period owing to this.

HDFC was able to wipe out all of its NPAs in FY03. Gross NPAs stood at 0.9% of total advances at the end of FY03. The provisioning made in the June quarter may have been more of a precautionary measure as net NPAs are non existent at this point of time.

The stock is currently trading at Rs 406, a P/E multiple of 15x its annualised 1QFY04 earnings. The company has done well to maintain consistency in its performance in the face of severe competition. While the growth potential of the company seems to be factored in the stock price of the company, further consolidation in the sector could be the next trigger.

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