Retail magic

Loan portfolio mix has driven margin growth at HDFC Bank

It's been another good quarter from HDFC Bank, which has once again managed to post a 31 per cent growth in its bottom line.

The net interest margin has expanded to 4 per cent in the September quarter from 3.8 per cent in last year's Q2 and 3.9 per cent in Q1 this year.

The strong margin growth has been driven by the changing mix in its loan portfolio""-52 per cent of the assets are now accounted for by retail loans compared with 46.7 per cent in Q2 '05.

With retail assets commanding higher yields, net interest income has grown a smart 44 per cent. The growth in other income of 112 per cent, however, needs to be seen in the context of the loss that the bank suffered in Q2 '05, when it transferred a large portion of its securities portfolio to the held-to-maturity (HTM) category. Even accounting for this, the growth in fees has been a strong 66 per cent. As a result, operating profit at Rs 470.64 crore has jumped a smart 56 per cent.

Provisions, however, have more than doubled in the quarter, thanks partly to the high proportion of securities in the HTM category. Besides, the high exposure to two-wheelers, personal loans and credit cards, has prompted the bank to provide more.

Despite this, the bank has managed to maintain its net non-performing loans (NPLs) at 0.3 per cent of customer assets. At the current price of Rs 654.50, the stock trades at 3.8 times estimated price to book for FY06. The bank has always commanded a premium multiple and there's no reason why it should not do so going ahead.

Bajaj Auto: Benefits of scale

With Bajaj Auto having beaten the Street's expectations for the September quarter's numbers, it was not surprising that the stock touched a high of Rs 1,809 on Monday.

The earnings before interest, depreciation and tax (EBITDA) at Rs 315.6 crore are up a smart 32 per cent y-o-y, on the back of strong revenue growth of 29 per cent. Moreover, not only are the operating profit margins up by 40 basis points y-o-y, sequentially too they have risen 110 basis points.

The sequential rise in the margin has been partly owing to lower input costs""- raw material to sales was down marginally to 69.5 per cent in the September quarter from 69.9 per cent in the June quarter.

On a y-o-y basis, the better OPMs are owing to strong sales and the relatively low increase in overall costs. There is also clear evidence that the company has pricing power "" this is reflected in higher sales growth of 29 per cent on a volume increase of 25 per cent.

Since the company is the market leader in the entry level and premium segments, it has ostensibly managed not just to pass on higher input costs but also protect its margins. The benefits of scale are beginning to kick in.

The strong net profit increase of 61 per cent to Rs 290.8 crore is partly because the company did not provide for any VRS as it did in Q1FY05.

Besides, the increase in the depreciation has been negligible. At the current price of Rs 1735, the stock trades at 18.6 times the estimated FY06 consolidated earnings of Rs 93.

Given the potential upside from the insurance JV"" Bajaj Allianz is now the number two player in the private sector"" the stock should continue to outperform.

Dissecting the Sensex correction

The markets have been edgy ever since the Sensex hit the 8500-level last month. Of course, the market index did rise to 8799 early this month, but the 265 point correction on September 22 was the first sign that markets had neared a peak.

The current levels are just about 3.5 per cent lower compared to the peak reached last month, but the going hasn't been as good for all the stocks that constitute the Sensex. Hindalco, for instance, has lost 19.4 per cent of its value during the period, while Ranbaxy has declined nearly 16 per cent.

The price correction was in double-digits for six other stocks - Grasim, ICICI Bank, Bharti, Reliance Energy, Tata Steel and HDFC Bank.

At the other end of the spectrum, stocks such as Dr Reddy's and Bajaj Auto have gained more than 8 per cent. In all, there were 11 stocks that gained and 15 that outperformed the Sensex return of -3.5 per cent.

Evidently, the correction in the Sensex hasn't been across the board, with only about half the stocks that make up the Sensex correcting sharply.

One interesting thing is that corrections have happened mainly in stocks with negative news flow - it's not that the markets have dumped everything.

The Hindalco stock, for instance, has fallen in the past month because of disappointment over the way the company's rights issue is structured, as well as the lower-than-expected production numbers for its copper smelter.

Ranbaxy, of course, was badly affected when a UK court ruled against it in a case against Pfizer. ICICI Bank fell because of the huge size of its secondary equity issue and the resultant equity dilution.

On the other hand, stocks such as Bajaj Auto, which reported strong vehicle sales numbers for September, and Infosys, which reported strong results for the September quarter, did well.

Apart from a few cases such as Bharti, which corrected for no particular reason except that its valuations were rather high, stock movement in the past month was largely dictated by news flow.

That makes the September quarter results all the more important, since there could be a free fall in stocks that don't deliver.