HDFC Bank: On a firm footing

Asset growth powers HDFC Bank's bottomline

HDFC Bank's first-quarter results show that not only has it increased its operating profit by 55.5 per cent compared with the first quarter of FY 2005, but it has also increased its operating profit sequentially by 6 per cent compared with Q4, FY 2005.

Net interest income was Rs 523.69 crore in Q1, about 2 per cent higher than in the previous quarter, and 31.3 per cent more on a y-o-y basis.

While asset growth, rather than an increase in margins, has been the driver of growth in net interest income, fee income too has risen handsomely.

At the net profit level, however, while growth has been 31.1 per cent y-o-y, there has been a decline compared to the March quarter.

That's because of provisions and contingencies, which rose from Rs 107 crore in the March quarter to Rs 165 crore in the June quarter.

Most of the increase is owing to higher general and specific loan loss provisions, which have almost doubled compared with the March quarter.

The management points out that that's because of a shift in the mix of advances, with an increase in the share of personal loans and credit card dues, which attract higher general provisions.

The segment break-up shows that while revenues from wholesale and retail segments have gone up on a sequential basis, segment profits have declined for both categories.

The management points out that the reason could be the securitisation that had been done in the last quarter of FY 05, which was absent in the June quarter.

And finally, while funds from the ADS issue powered asset growth in Q1, the bank's deposit growth, at 22.1 per cent y-o-y, is well below that of its 39.6 per cent growth in customer assets. Going forward, deposit growth will have to be higher to match the bank's asset growth.

Hexaware

Till recently, Hexaware was among the most expensive IT stocks in the mid-cap space, thanks to its assertion that its growth rate would be much higher than that of industry.

Before the company revised its guidance this Wednesday, it had reiterated a number of times that its revenues would grow by 40 per cent this calendar year and that earnings would jump by 80 per cent.

As a result, the Hexaware stock enjoyed valuations as high as 16 times estimated CY05 earnings.

The revised guidance puts revenue growth at 26 per cent and the earnings growth estimate has been reduced rather dramatically to 29-36 per cent (80 per cent earlier).

As a result, the Hexaware stock fell 13.3 per cent to Rs 105 on Thursday, levels last seen at the beginning of the year.

Earlier, in May this year, the company had reiterated that it would meet its guidance despite Oracle's announcement that it would acquire its India Service Centre (a development centre it ran for PeopleSoft) in October this year.

The centre accounts for 13 per cent of the company's revenue, which meant that Hexaware's revenue growth would be impacted in the December quarter.

Even now, the company hasn't blamed the PeopleSoft acquisition for the revision in its guidance. The problem according to it is unexpected delays in project ramp-ups lately and sluggish revenue growth from new clients.

Also, while the revised guidance seems much more realistic, it's important to note that the impact of the PeopleSoft development centre takeover would be felt largely in CY06, since it is expected to account for about 10 per cent of revenues this year.

Also, since almost all the work at the centre was done offshore, its margins were high, which means that the impact on profit would be even higher.

Given the drop in earnings growth estimates for two years, there could be a further revision in Hexaware's valuations, since it still trades at 14 times FY05 earnings.

iGATE Global Solutions

iGATE has turned in a lower gross profit of Rs 42.4 crore for the quarter ended June, which is a fall of 4.9 per cent on a sequential basis.

The drop in profit was owing to a poor growth in its top line. Operating revenues, at Rs 147.4 crore, grew just 1.3 per cent sequentially, partly because of an appreciation in the rupee against the euro and the pound.

In volume terms, growth was slightly better at 4 per cent.

Offshore revenues rose 7.4 per cent, at a higher rate compared with onsite revenues. Also, offshore realisations increased by 3.5 per cent while onsite realisations were up only marginally.

Despite this, margins took a hit, mainly because of higher employee costs. The company gave employees an average salary hike of 13.7 per cent.

As a result, gross profit margin fell to 28.7 per cent from 30.6 per cent sequentially. Profit before tax fell by as much as 62 per cent, owing to a steep fall in other income.

Nevertheless, the company reported that business from its top ten clients grew by 12 per cent last quarter. Also, it now has four $5 million accounts, compared with two about a year ago.

The management has claimed that it has been able to negotiate better rates from new clients.

Revenues from GE, however, continue to account for a high 36 per cent of revenues, which is bound to put pressure on margins.

iGATE trades at nearly 30 times 12-month trailing earnings of Rs 7.9 per share, which is rather high given that the company continues to face pressure on its margins.

With contributions from Amriteshwar Mathur and Shobhana Subramanian