• OUTLOOK ARENA
  • VIEWS ON NEWS
  • JULY 26, 2002

HDFC: Will it maintain the sheen?

HDFC has reported a strong performance again with 20% growth in earnings and an improvement in operating margins for the June quarter. The company's interest income growth however, slowed down due to decline in investment income. HDFC's interest on core loans increased by 17% during the quarter.

(Rs m)1QFY021QFY03Change
Income from operations 6,104 6,80911.6%
Other Income 236 230 -2.8%
Interest expense 4,624 4,9757.6%
Net interest income 1,480 1,83323.9%
Other expenses 355 3755.7%
Operating Profit 1,125 1,459 29.6%
Operating Profit Margin (%)18.4%21.4% 
Provisions and contingencies 30 300.0%
Profit before Tax 1,332 1,65824.5%
Tax 191 28549.4%
Profit after Tax/(Loss) 1,141 1,37320.4%
Net profit margin (%)18.7%20.2% 
No. of Shares (m) 120.1 121.7  
Diluted Earnings per share*37.545.1 
P/E Ratio 13.7 

HDFC's approvals and disbursements witnessed a commendable growth of over 30% during the quarter. In respect of individual loans, while approvals increased by 35%, disbursements grew by 37%. Individual loans account for over 70% of the total loan portfolio of the company. Lower interest rates, tax incentives and stable property prices have made housing more affordable. The company's robust retail growth was also a result of an increased network of offices and intensified marketing efforts.

Revenue mix
(Rs m)1QFY021QFY03Change
Interest on loans 4,613 5,395 17.0%
Dividends 260 266 2.5%
Lease rental income 126 116 -8.1%
Other operating income 1,104 1,031 -6.6%
Total 6,104 6,809 11.6%

On the liability side too, HDFC's deposits increased by 24% to Rs 97 bn during the June quarter. The total number of deposit accounts now exceeds 1.3 m. The company managed to bring down its cost of deposits, which is reflected from about 300 basis points improvement in operating margins. HDFC has issued Floating Rate Notes (FRN) in international markets for an amount equivalent to US$ 100 m. Overseas borrowings at comparatively lower interest rates seems to have brought down the company's average cost of funds to 10% from 12% in the comparable previous quarter. Steep decline in cost of funds, improved its core loan spread to 1.9% during the quarter from 1.5% in 1QFY02. Also, the company's stringent cost control measures enabled it to improve its cost to income ratio to 18% from 21% in the comparable previous quarter. However, with increasing competition from banks, the company's operating margins could come under pressure in the coming quarters.

Among other new developments, HDFC has entered into joint venture with Chubb Corp, US for general insurance. HDFC will hold 74% equity in the JV company and the balance will be with Chubb. The JV received the approval on July 18, 2002 from IRDA and plans to begin operations by September 2002. Initially, the company will launch its operations in 6 cities, Mumbai, Delhi, Bangalore, Hyderabad, Pune and Chennai. HDFC has not indicated the amount of investments in this JV.

At the current market price of Rs 618, HDFC is trading at a P/E of 14x 1QFY03 annualised earnings and price to book value ratio of 2.8x. HDFC's premium valuations are due to its ability to maintain strong growth rates and asset quality, despite stiff competition. However, its incremental investments in insurance are unlikely to generate returns in the near term, which could trim the overall growth of the company in coming years and consequently valuations. Average yield on investments declined to 16.2% in the June quarter from 18.3% in FY02 and 17.7% in 1QFY02.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407