HDFC: Slower growth

Loan growth has moderated in Q4FY08

Home loan major HDFC has seen a lower disbursal of housing loans in the March 2008 quarter, at an estimated 22 per cent, compared with around 29.5 per cent in the December 2007 quarter. However, it's possible that HDFC has been lending less to developers rather than individuals.

The street was somewhat disappointed though and the stock lost 2.6 per cent in Wednesday's trading session to close at Rs 2805.

The profit before exceptional items grew at 31.5 per cent in the March quarter compared with a growth of 41.5 per cent for the year FY08.

The moderation in credit growth apart, HDFC has managed to improve its net interest margin (NIM) posting 2.32 per cent at the end of FY08, better than the 2.18 per cent recorded at the end of FY07 and similar to the NIM of 2.3 per cent at the end of the December 2007 quarter.

With the cost of borrowings fairly steady, the company gained from the hike of 75 basis points in home loan rates it had taken last year, even though it dropped rates from February 2008 by 25 basis points. Moreover, the finance company's book remains as clean as ever with net non-performing loans at 0.05 per cent.

Taking into account the value of subsidiaries including the bank, insurance firms and asset management company, analysts value HDFC at Rs 3,400 which leaves a 20 per cent upside from current levels.

Nestle: Pricing power

With earnings up a stunning 48 per cent and operating margins up 220 basis points in the March 2008 quarter, it's evident that the Rs 3,504 crore Nestle is seeing the benefits of operating leverage.

These are kicking in because the food major has posted strong growth in domestic sales, at just over 29 per cent, well above the 25 per cent growth seen in CY07.

Nestle continues to see pricing power in beverages and milk products, while volumes are probably being driven by prepared dishes -estimated to have grown 30 per cent "" and chocolates.

Scale benefits have pushed up operating margins and helped Nestle to maintain the raw material to sales ratio. Raw material costs are increasing because prices of key inputs like milk and wheat are much higher than they were a year back.

For the March quarter, margins were 22.2 per cent compared with 19.1 per cent for CY07. Not surprisingly the stock surged 9 per cent to Rs 1,774 on Wednesday.

At this price, the stock trades at 28 times estimated CY 08 earnings and is not inexpensive but the stock should outperform since top line growth is likely to be sustained given that higher disposable incomes are resulting in a greater demand for packaged foods and beverages. However, inflation in agricultural products which are important inputs for Nestle, could put pressure on margins.