Robust loan growth, stable spreads and improved asset quality are key reasons behind the better-than-expected profit delivered by HDFC for the March 2012 quarter. HDFC’s loan growth (after considering loans sold to HDFC Bank) at 20 per cent was better than expectations of 18 per cent, driven largely by a strong traction in the individual loan book, which grew 21 per cent. The loan growth was in line with the 19-22 per cent range witnessed in the past three quarters. These helped the company post net interest income (NII) growth of 24 per cent and net profit growth of 16 per cent over the March 2011 quarter.
Disbursements and app-rovals registered growth of 18 per cent and 20 per cent, respectively, in the March quarter, an indication of future prospects. Keki Mistry, vice chairman and chief executive, said he expects the company to clock a healthy loan growth of 18 per cent in FY13 as well. While growth in certain markets like Mumbai has mellowed, demand across most other cities remains healthy, said Mistry.
While the fundamentals and growth outlook remain good, the stock is likely to be range-bound, as valuations are fair and macro-economic conditions muted. Investors with a long-term outlook can consider buying on corrections.
| STABLE GROWTH |
| In Rs crore |
Q4’FY12 |
FY’12 |
FY13E |
| Net interest income |
1,867.0 |
5,906.0 |
6,933.6 |
| Y-o-Y change (%) |
23.6 |
19.7 |
17.4 |
| Spreads (%) |
2.3 |
2.3 |
2.4 |
| Y-o-Y change (bps) |
6.0 |
6.0 |
8.0 |
| Net profit |
1,326.1 |
4,122.6 |
4,794.6 |
| Y-o-Y change (%) |
16.1 |
16.6 |
16.3 |
Net interest income is the difference between interest earned and paid
E: Estimates (prior to results)
All figures are on standalone basis Source: Company, analyst reports |
Q4: Stable spreads
Though loan growth for the quarter looks healthy, it is much better if adjusted for the loans sold to HDFC Bank. Assuming HDFC had not sold its loans to HDFC Bank, its overall loan growth would have been 25 per cent and individual loan book growth at 27 per cent. For the full year, the average size of individual loans stood at Rs 19.5 lakh as compared to Rs 18.6 lakh in the previous year, partly the result of higher property prices. This has aided HDFC’s loan book and interest income during FY12.
HDFC managed to improve its net interest margin (NIM) by 10 basis points sequentially (over the December 2011 quarter) to 4.36 per cent, helped by lower cost of funds. The spreads remained stable on a sequential basis at 2.27 per cent. Though it came off by six basis points compared to the year-ago period, it was within the guidance provided in the past. Notably, the company earns interest at a weighted average rate of 1.53 per cent on loans sold to HDFC Bank, supporting its spreads. Surprisingly, despite the high interest rate scenario, HDFC’s cost of funds declined by 61 basis points sequentially, aiding margins. Higher yields on advances (up 67 basis points sequentially) and better cost management have helped. The management is confident of keeping spreads within the band of 2.25-2.35 per cent.
In the March quarter, HDFC continued with the trend of improving asset quality (see chart). Similar to past trends, the company has maintained higher provisions on bad loans. Even as NHB raised its provisions requirement, HDFC’s provisions at Rs 1,671 crore were higher than the requirement of Rs 1,402 crore. The management remains positive on asset quality and expects to improve these.
Last, but not the least, despite a 41 per cent fall in profit on sale of investments to Rs 79.1 crore HDFC posted growth of 16 per cent in net profit for the quarter, ahead of Street estimates. The fall in profit on sale of investment was essentially due to the high base effect in March 2011, when the company gained from the sale of stake in IL&FS. Additionally, cost-to-income ratio also slipped and aided overall profitability.
Outlook, valuations
Given the better-than-expected profitability in the March quarter, expect the Street to marginally up its FY13 earnings estimate for the company. On Monday, the stock ended up 0.57 per cent, slightly better than the 0.48 per cent gains made by the Sensex. At 4.3 times FY13 estimated book value, the stock is currently trading a little lower than its historical average price to book of 4.6 times. However, experts believe all positives are already reflecting in the price and hence, the near-term upsides are capped from current levels.
Says Dhananjay Sinha, co-head research economist and strategist at Emkay Global, “HDFC’s results were much more positive than expected due to higher NII (net interest income) and robust loan growth. We maintain our ‘hold’ rating and Rs 700 target price as we think current valuations appear to be near its fair value.”
While a further deterioration in economic conditions (read job losses) could hurt housing loan demand and prove negative for companies like HDFC, an IPO by the company’s life insurance business will provide trigger for the stock.
Amongst HDFC’s other businesses, the life insurance business (HDFC Life) turned profitable to deliver Rs 271 crore in net profit for FY12. HDFC plans to list HDFC Life sometime in 2013, and the management is awaiting more clarity on foreign ownership in insurance companies before taking a call on the issue.
