• JUNE 20, 2001

HDFC: Subsidiary jigsaw

Over the past few years, HDFC has maintained consistent financial performance. In the recent years the company is diversifying from its core business of housing to areas such as IT, insurance, asset management and commercial banking.

HDFC has opened separate subsidiaries for its other businesses. Its commercial banking venture has proved to be the most profitable. (Currently the company has around 28% stake in HDFC Bank.) On a consolidated basis, the subsidiaries contribute 9% to total profits and 4% to revenues.

Performance of subsidiaries
(Rs m)HDFC's stakeInvestmentsRevenuesProfitsAssets
HDFC Developers100% 1 12 4 41
HDFC Investments100% 810 52 50 829
HDFC Holdings100% 24 0 (1) 1,254
HDFC Asset Management100% 200 80 (54) 200
HDFC Trustee Company100% 1 1 (0) 1
HDFC Standard Life71% 1,200 27 (13) 17
HDFC Realty71% 28 2 (24) 40
GRUH Finance55% 195 801 60 5,069
HDFC Securities30% 9 NA NA NA
HDFC Bank28% 256 12,595 2,101 156,173
Intelenet Global Services50% 40 NA NA NA
Total  2,764 13,570 2,124 163,623
NA: Not Available

HDFC has invested about Rs 2.8 bn in these ventures till date, which have resulted in a return on investment (ROI) of over 15%. On the other hand HDFC’s returns from its core business of housing stands at 20%. However, if we remove the amount invested (Rs 1,200 m) in the insurance venture, the ROI will shoot up to 27%. Insurance being a relatively new area, it is likely to take atleast six years for the company to break even.

HDFC is using all its channels efficiently for the distribution of insurance products. The company has a network of 50,000 agents and 1.2 m depositors. Also, HDFC Bank has a customer base of about 1.5 m. HDFC is capitalizing on its brand name and wide network of agents to generate revenues from insurance venture. The sector presents huge untapped potential, as penetration of insurance in India is just 22%. Currently, the product in India is bought generally as a tax saving instrument. As more are more people are educated about benefits of insurance, volumes are likely to increase. However, the market is becoming competitive with the entry of several private insurers. To capture a reasonable market share, HDFC will have to continuously introduce innovative products.

Excluding HDFC Developers and HDFC Investments Company, all the other subsidiaries are making losses. Return on assets on the Gruh Finance at 17% is however encouraging, as HDFC has taken a stake at relatively low price. GRUH’s own ROA is a marginal 1.2%. HDFC Securities is facing tough conditions from the other players and Intelenet Global Services has not yet started its business. Intelenet is a joint venture with TCS to provide IT enabled services to prospective clients in US. The company has already built a call centre at Navi Mumbai. The business has however not started.

HDFC has set the road map for the future growth. While its investments in new businesses may not yield immediate returns, they are likely to enhance HDFC’s returns on equity over the medium term. It will also help in expanding its customer base and provide more credence to its cross-selling efforts. However, it will not be easy for the company to replicate the success of housing finance business.

At the current market price of Rs 667, the stock is trading at a P/E of 15 times and Price to Book value ratio of 3x its consolidated FY01 earnings.

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