While September quarter results of HDFC look good and an upswing in credit demand is visible, its stock already captures most of the positives.
The country’s largest property mortgage firm, HDFC’s performance for the September 2009 quarter was ahead of Street expectations. Although profits got a boost from higher other income, on the whole, the performance was a mixed bag. On one hand, loan growth was muted and its net interest margins (NIMs) came down compared to the year ago quarter. On the other hand, the company reported stable spreads, curtailed the proportion of bad loans and importantly, reported a good rise in loan growth. Signals of a pickup in demand are also visible, which indicate that the coming quarters should be better. Nevertheless, a lot of the positives are already priced in the share price, leaving limited upside in the near-term.
Q2, a mixed bag
HDFC’s core fund-based performance, represented by net interest income (NII), which is the difference between interest earned and interest expended, was subdued for the September 2009 quarter. Its NII was up by a mere 1.8 per cent y-o-y. Analysts indicate that lower volumes and a roughly 40 basis points dip in NIMs (primarily due to lower investment yields) restricted NII growth. Additionally, interest rates have also been on a decline in the last few months.
The company’s other operating income namely, dividend and fee-based income which are mainly recurring in nature, jumped 130 per cent to Rs 160 crore. This helped the company report a respectable 17 per cent rise in total income. With operating expenses down 250 basis points and tax outgo up just 10 per cent, net profits grew robustly in the September 2009 quarter.
Importantly, while the company has been facing increased competition from public sector banks in the retail mortgage space, it has been able to sustain spreads at around 2.2 per cent levels. Keki Mistry, vice chairman and MD, HDFC, says “The company expects the spread to be in the band of 2.15-2.25 per cent as in the last five years. Analysts say that with stable spreads, which reflects that the company is efficiently managing its cost of funds, there is little reason to worry over any fluctuation in quarterly numbers.
Healthy asset quality
Even as the world and India saw the worst ever crisis in over half a century, HDFC has been successful in keeping a tab on its bad loans. Its gross non-performing loans (NPLs) as a percentage of total loans were down nine basis points y-o-y at 0.95. Notably, its net NPLs were down 20 basis points at 0.2 per cent for the September 2009 quarter. The company management says the September quarter was the 19th consecutive quarter end when the NPLs have been lower than the corresponding previous year’s quarter. Since the company has also provided for most of the bad loans (coverage at 79 per cent), all these indicate that asset quality is healthy.
Demand is perking up
Going ahead, with demand from the residential segment showing signs of improvement, expect HDFC’s numbers for core fund-based income to improve. Loan sanctions and disbursals (adjusted for loans sold) were up 18 per cent and 29 per cent y-o-y, respectively for September quarter. Mistry says that the credit off take in the remaining part of year would be better. “Loan sanctions as well as disbursals are expected to grow at 20 per cent annually.” In the near-term though viz. over a few quarters, expect these to record faster growth due to the combined effect of a pickup in residential loans and the low-base effect of last year.
Conclusion
Time and again, HDFC has proved its mettle in the mortgage finance business by emerging stronger, whether it was from a situation of declining demand, margin pressure or intensifying competition. Notably, over the last many years, it has maintained its asset quality as well as a good liability (borrowing) mix to the envy of many of its competitors. Given the past track record and the outlook over the near-to-medium term, HDFC should be able to sustain an annual growth of around 18-20 per cent in its net profit for the current fiscal and next.
Among its key holdings, the company is expected to unlock some value for shareholders when it goes for a listing of its life insurance business, which comes under HDFC Standard Life Insurance Company. Along with other holdings like HDFC Bank, the asset management and general insurance businesses, the value of these holdings, as estimated by analysts, is between Rs 710-770 per share of HDFC.
Including the value of unrealised gains on listed investments worth Rs 13,300 crore as on September 30, HDFC’s adjusted book value would stand enhanced to Rs 981 per share as against the reported Rs 514. Analysts estimate the reported book value to rise to Rs 600-610 by 2010-11, and value the stock between 3.75-3.90 times the book value, which translates into a value of Rs 2,250 per share at the lower end. The total value on a sum-of-a-parts basis (including subsidiaries and other investments) works out to about Rs 2,900 per share at the lower-end and Rs 3,050 at the upper end, say analysts. Thus, the upside from the current price of Rs 2,824 is limited. In short, the stock looks fairly valued at current levels and investors may consider it on dips with a long-term perspective.
