HDFC: Cashing in on liquidity

This is a good time to raise money and issue stock given that it trades somewhere close to its sum-of-the-parts value.

Home loan major HDFC is picking up money at around 7 per cent by giving investors a sweetener in the form of an equity warrant.

Otherwise, the cost may have been slightly higher at 7.25-7.5 per cent for the three-year paper. Since there seem to be lenders in the market, this is as good a time as any to cash in on their appetite, given that the demand for home loans should start picking up.

The cost of borrowing Rs 4,000 crore in the overseas markets would certainly have been higher with spreads having widened. The stock has had a fairly strong run — since the start of the year it has risen 57 per cent compared with 50 per cent for the Sensex. So, the conversion price for the warrant will be fixed at a high valuation since it will be at a premium to the prevailing market price. This is a good price at which to issue stock and in any case, the company’s equity base will not be diluted by more than 3.5 per cent. HDFC’s weighted average cost of funds came down by around 50-75 bps sequentially in the March 2009 quarter with the marginal cost falling by about 200-250 bps. In the current year, the loan book should grow by at least 20 per cent — sanctions were up 17 per cent y-o-y in the March quarter on a high base. However, at Rs 2,359 the stock trades close to its sum-of the-parts value of Rs 2,300.