To our Shareholders
We have had an extraordinarily good financial year. The demand for home loans continuedto be strong with much of the headwinds of the previous year being behind us. We had asuccessful listing of our subsidiary HDFC Life which enabled us to monetise a part ofour stake in the life insurance company. Right from the beginning we had told ourshareholders that investing in the insurance sector required patient capital. We supportedand nurtured HDFC Life for seventeen long years prior to its listing. We believe listingbest reflects the value we have created for our shareholders.
We concluded the financial year with an equity share capital raise of Rs. 13000 crore.A large part of the capital raised will be utilised to maintain our shareholding in HDFCBank. Our investment in the bank has been amongst our best value drivers for severalyears.
HDFC continues to maintain a fortified balance sheet. We now feel that the time isright to lay the foundation for the next phase of long-term growth and sustainability.
Some of our plans for the future are still at the drawing board stage. Yet we know thebroad contours. We want to focus on strengthening our presence across the entire valuechain of housing seek opportunities in stressed real estate assets mark a deeperfootprint in the health insurance space and explore emerging organic and inorganic growthopportunities. Besides this we will continue to support the growth of our subsidiarycompanies.
Building for the Long-Term
As a financial conglomerate we need to keep building for the future. Our key long-termpriorities are ethics transparency performance and customer-orientation. We willcontinue to pursue these priorities with vigor whilst focusing on the potential to createlong-term value.
We regularly engage in dialogue with our stakeholders on developments of theCorporation but desist from the practice of quarterly or annual earnings guidance. Listedcompanies do feel the pressure - not of quarterly reporting per se but meeting short-termexpectations of the markets in an increasingly volatile environment. Globally there is adiscernible trend of companies curtailing capex holding back on investing in new productsor reducing budgets on human resources research and development. These are oftenmyopically construed as dispensable costs. Nothing can be more damaging to a company thanputting off long-term investments to appease short-term stakeholders.
Fortunately there is now a chorus of saner voices highlighting the long-term perils ofshortterm thinking. This also calls for a mind-set change on the part of both companiesand the investor community to lay less emphasis on the short-term. A period of one quarteris way too short in the life of a company. Many industries are cyclical in natureincluding housing.
To reiterate we are completely in for the long-term. We like long-term investorsnurture long-tenured employees and strive for loyal customers who stay with the HDFC groupof companies for years.
An Era of Housing Reforms
Urbanisation is an irreversible trend in India. By 2030 it is estimated that half ofIndia's population will be residing in urban areas. An overwhelming majority of India'sGDP growth jobs and wealth are created in its cities. Existing cities have to grow theperipheries and new cities need to be created to absorb the influx of people.
Clearly more houses are needed. But to keep pace with the demand there is an urgentneed for many more construction and contracting companies. Construction of affordablehousing on a mass scale needs thousands of plumbers electricians carpenters masonsamongst several others. The housing sector always fuels the job market. If job creation isthe need of the hour for the country then the solution lies in building more homes.
So what makes us optimistic about the future Rs.
The impetus given to increasing homeownership over the past two years by the presentgovernment has been unprecedented. Especially in the affordable housing space the slew ofmeasures undertaken to incentivise developers financiers and homebuyers has resulted invisible change on the ground.
Activity in the construction sector has picked up and housing credit growth has beenrobust. The pool of financially stronger real estate companies focusing on affordablehousing has widened largely due to the attractive tax incentives. This augurs well forthe supply side. The interest subvention scheme has been well received and with thewidening of its scope the number of beneficiaries is expected to rise. Housing financecompanies now have a diversified pool of resources to tap into with the liberalisation ofexternal commercial borrowings and masala bonds.
Incentives or subventions are generally temporary in nature. Yet the most significantmeasure taken has been the discipline brought in for developers and the protection ofhomebuyers which is now permanently enshrined in the Real Estate (Regulation andDevelopment) Act 2016. Though implementation within states varies RERA marks an era ofconfidence for all prospective homebuyers.
Calling for Transparency
The central government has outdone itself in its support to the housing sector. Thesingle roadblock in the housing sector today is the cussedness of state governments andlocal level authorities in embracing a transparent and streamlined process for buildingapprovals. In so many ways the government has been ahead of the curve in adoptingdigitisation to make processes more efficient. Yet one fails to understand the reluctanceto put in place an online time-bound single-window clearance mechanism for at leastfast-tracking the numerous approvals required for affordable housing.
Many of our long-term shareholders would have noticed that I keep raising the issue ofthe need for greater transparency in building approvals. The reason I do so is because itis the homebuyer who is hurt the most. Price escalations due to delays and payment ofspeed money for building approvals are ultimately costs borne by the homebuyer.
The clarion call from the highest authority in the country to "free the housingsector of corruption and middlemen" is significant. Perhaps the central governmentneeds to implement a carrot-and-stick approach which either incentivises stategovernments who fast-track approvals for affordable housing or penalises them for notfalling in line. Quicker approvals shorten construction timelines and this will helpreduce the overall cost for a homebuyer.
Housing Finance: Next Steps
One aspect that the housing sector has always grappled with is how can land be madeavailable at reasonable prices Rs. The answer lies in smart regulation.
For the past twelve years the regulators have not allowed banks and housing financecompanies (HFCs) to fund land transactions yet non-banking financial companies (NBFCs)and private equity players are permitted to do so. This regulatory arbitrage allows NBFCsand private equity players to levy prohibitively high interest rates on developersborrowing to acquire land.
My key question is if NBFCs are allowed to cross over into activities of HFCs then whycan't HFCs be permitted to fund developers to buy land for affordable housing Rs.
One can understand the central bank's predicament of not wanting banks at this junctureto fund land transactions. But the core role of HFCs is to support housing. If HFCs of acertain threshold size are permitted to fund developers to acquire land for affordablehousing then the current high interest rates are likely to get rationalised. This in turnwill help reduce the ultimate cost for a homebuyer.
HFCs are well regulated. The National Housing Bank the regulator for HFCs understandsthe nuances of housing markets and can ensure there is sufficient vigilance to guardagainst any speculative funding of land transactions.
Secondly the growing practice of housing finance players picking loans off eachother's balance sheet needs to be carefully monitored. With the regulators prohibitingprepayment charges on most home loans no one gains in this game except the agent whokeeps collecting commissions. Lenders do incur costs while originating loans. It is thuslogical that there be some compensation to a lender especially when a customer ispoached within a timeframe of say less than two years. To my mind regulators should notencourage 'lazy housing finance'.
I am told HDFC has delivered amongst the best-in-class shareholder value - an estimated360 times increase in market capitalisation over a 25-year period between 1993 and 2018.There are now four listed entities within the HDFC group and one more is on the anvil. Wehope to have the initial public offering of HDFC Asset Management Company Limited launchedshortly.
Our stock market performance is simply a reflection of the progress we have made overthe years. Long-term investors who understand how we work should not get perturbed withshort-term market volatilities. After all resilient businesses take time to grow - ourfinancial results of today are in actuality a reflection of our actions taken severalquarters and several years ago.
Finally I think it is important to reiterate to all our shareholders that successionplanning both within HDFC and its group companies is a key agenda on each of therespective boards. As passionate and energetic as some of our leaders within the HDFCgroup are about their jobs the reality is that individuals do get on in age.
Personally the task of ensuring frictionless transitions is and will be on the top ofmy mind. That said it is not as if there will be any announcements right away. All theboards of the HDFC group of companies believe that succession planning needs a time frameof 18 to 24 months to ensure a smooth transition.
I am confident of the strong pipeline of talent for various functions across allcompanies within the HDFC group. Yet positions at the helm require the respective boardsand nomination and remuneration committees to evaluate options of both internal andexternal candidates. At HDFC the board and Keki Mistry have agreed that he will continuein his present capacity as Vice Chairman and CEO for a period of three years subject toshareholders' approval.
I could not be more grateful to all the leaders across the HDFC group for theextraordinary work that they do each day. Yet each one of these outstanding leaders standtall because of their strong and cohesive teams that back them.
As for me I won't lose sight of the fact that it is the continued support of ourshareholders that gives me the privilege to serve as non-executive chairman.