HDFC: Consistent performer

Operating profit went up during the quarter, aided by strong jump in other income and control over operating expenditure

Home finance major HDFC reported a 66 per cent y-o-y growth in net interest income to Rs 730 crore in the quarter ended December 2007.

Net interest margins remained stable at about 2.3 per cent as interest income grew at a faster rate of about 48 per cent than interest expenses rise of 39 per cent.

Approvals and disbursements for the nine months ended December 2007 went up by a robust 30 per cent and 28 per cent to Rs 29,376 crore and Rs 22,285 crore respectively.

Operating profit went up by almost 98 per cent to Rs 880 crore, aided by strong jump in other income and control over operating expenditure, which increased by just 18 per cent.

In the December 2007 quarter, HDFC sold 7.15 per cent in its life insurance arm to Standard Life for a profit of about Rs 120 crore. However, even excluding this extraordinary gain, the operating profit growth has been impressive at 70.7 per cent to Rs 759 crore.

The company has received clearance from IRDA to sell 26 per cent in the general insurance business to Ergo and this will fetch the company Rs 235 crore.

There will be similar value unlocking opportunities in the future due to HDFC's investments in subsidiaries such as mutual fund (proposed to be listed) and banking (listed).

Analysts have estimated the value of the investments at Rs 1050-1100 a share. The stock is quoting at a high valuation of 6.2 times and 5.1 times estimated book value for FY09 and FY10 respectively and this includes the value of its investments and subsidiaries.

At Rs 2820, the stock remains a long term investment due to its consistent financial performance, steady net interest margin and strong asset quality in its core business apart from value unlocking potential of its subsidiaries.

Hindalco: Losing shine

Hindalco's performance in the December 2007 quarter was adversely affected by lower aluminum prices on a y-o-y basis, coupled with sluggish treatment and refining charges in its copper division.

Moreover, the company grappled with an 11-12 per cent y-o-y appreciation in the rupee during the quarter and the import duty reduction on alumina and aluminium.

As a result, the company's operating profit declined 23.4 per cent y-o-y to Rs 800.6 crore in Q3 FY08 and net sales declined 2.7 per cent to Rs 4531.7 crore.

Its operating profit margin also came down by 470 basis points y-o-y to 17.7 per cent in the last quarter.

Rival Nalco's operating profit margin also declined over 1800 basis points y-o-y to 39.7 per cent in the December 2007 quarter.

Meanwhile, Hindalco had to grapple with the average price of aluminium, which declined to $2,443 a tonne on the LME in Q3 FY08.

As a result, segment profit of the aluminum division declined 23.4 per cent y-o-y to Rs 578.9 crore during the quarter.

In the copper division, the treatment and refining charges (TC/RC) declined to 21.7 cents a pound in the December 2007 quarter compared with 37 cents a year earlier.

The weakness in the TC/ RC rates is attributed to a global shortage of concentrate supplies, according to analysts.

Though Hindalco's sales of higher margin CC rods rose 24.4 per cent y-o-y in the last quarter, the segment profit of the copper division declined 41.1 per cent y-o-y to Rs 94 crore in Q3 FY08. The stock trades at 10 times estimated FY09 earnings and is likely to remain an underperformer.

With contributions from Priya Kansara and Amriteshwar Mathur