An improving economic outlook, coupled with attractive finance schemes, pushed up demand for housing in the last few quarters. This helped lenders finance more customers. India’s leading housing finance company, HDFC, was no exception. It saw its disbursals and loan book grow strongly in the March quarter.
With a relatively lower cost of deposits, HDFC delivered 26 per cent growth in profit — ahead of Street’s expectations. HDFC has also announced a stock split to increase investor participation. Shareholders will get five shares of Rs 2 each for every share they hold. Overall, with business outlook seen improving, HDFC’s stock should deliver healthy returns over a year.
A pick-up in mortgage demand and introduction of teaser rate loans from December 2009 helped HDFC sustain the momentum in disbursals in the quarter. The loan book, which grew 30 per cent in the September 2008 quarter, saw growth slipping to 9 per cent in the December 2009 quarter due to slackening demand.
However, the loan book has been expanding since three months. It grew 15 per cent in the March quarter. Adjusting for loans sold, the company’s loan book growth stood at 19 per cent year-on-year.
Higher disbursals saw net interest income (interest income minus expended) growing around 30 per cent (highest in the last six quarters) in the March quarter. Overall, disbursals touched Rs 16,900 crore (up 36 per cent year-on-year). Loan approvals also matched pace, rising 27 per cent to Rs 19,500 crore. Of late, a major push is coming from individual loan approvals and disbursements, that showed sequential growth of 46 per cent and 53 per cent, respectively, in the March quarter.
Even as competition heated up with the onset of teaser rate loans in the fourth quarter of 2009-10, HDFC’s net interest margin was 4.3 per cent, up 90 basis points sequentially, led by lower cost of deposits. The competition is expected to remain stiff as SBI has extended its teaser loan rates till June 30. While HDFC allowed its earlier offer to lapse on April 30, it introduced a new offer last month.
Nevertheless, an increase in higher disposable incomes and a likely shift in banks’ focus to other customer segments in order to grow their balance sheets could help HDFC grow its loan book 20-25 per cent annually in the next two years. The thrust on operational efficiencies improved its cost-to-income ratio to 4.1 per cent in the March quarter from 5.3 per cent a year ago. The asset quality also improved with non-performing assets (NPAs) at 0.8 per cent and a provision coverage of 85 per cent.
HDFC’s stock has outperformed broader indices since the start of 2010 and is trading at 4.4 times estimated 2010-11 book and 23 times its estimated 2010-11 earnings, and can be considered for investment.