The cost at which home loan major HDFC is borrowing Rs 4,000 crore — 7.15 per cent for two years and 7.85 per cent for three years — is very reasonable. The money will come in handy for the company to subscribe to warrants of HDFC Bank for an estimated amount of Rs 3,600 crore. The qualified institutional buyers (QIBs) who have bought the non-convertible debentures (NCDs) are also entitled to warrants, which can be converted into shares within three years at Rs 3,265 per share.

Since investors will pay around Rs 275 per share upfront, the strike price of close to Rs 3,000 per share works out to a premium of roughly 30 per cent to the current market price of Rs 2,252. That’s a fairly handsome premium and, should all warrants be converted, HDFC will be left with a capital of around Rs 3,000 crore. Moreover, the dilution of the equity base will be just 3.5 per cent.

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However, in the last six months, HDFC has sold loans worth Rs 5,600 crore to HDFC Bank; in the June quarter, the amount was Rs 1,300 crore. Adjusting for this, the loan growth was 20 per cent rather than the 13 per cent reported and the spreads were reasonable. The good news was that retail loan approvals were up 45 per cent in the June quarter over the March 2009 quarter, indicating a fairly sharp recovery in demand and resulting in a sequential increase in disbursements of 19 per cent.

It’s true that the net interest margin (NIM) was subdued — spreads, at 2.19 per cent, came off a bit relative to the March 2009 quarter. However, with high-cost debt of close to Rs 5,000 crore and priced at around Rs 10.5 per cent being rolled over in the next few months, spreads should improve.

Besides, interest rates in the system have trended down, though there is some apprehension that long-bond yields will firm up towards the end of the year. Nevertheless, with impeccable asset quality, HDFC is attractively valued at a price to book value of just over 3 times for 2009-10, excluding subsidiaries.

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