HDFC Bank: Good growth, some concerns

Higher fee income boosts HDFC Bank's operating profit

HDFC Bank's net profit has grown 31 per cent on a year-on-year basis, but its operating profit growth has been 35.9 per cent y-o-y, compared with Q2's 31.25 per cent.

This jump in operating profits has come about due to a substantial rise in "other income" with fee income and income from forex trading and derivatives increasing sharply.

Growth in net interest income, on the other hand, was lower than the growth in Q2.

That's surprising, considering that growth in "core customer assets" "" advances, corporate debentures, commercial paper etc "" was 42.6 per cent in Q3, compared with 37.5 per cent in Q2.

But interest expended as a percentage of interest earned went up from 42.8 per cent in Q2 to 43.5 per cent, indicating a slight squeeze in margins.

The segmental results also show a significant fall in margins in the retail segment, compared with the previous quarter. In fact, profits from the retail segment were lower in Q3 than in Q2, despite higher revenues.

This has occurred despite substantial growth in retail assets. However, revenues as well as profit from the wholesale segment rose sharply, while treasury losses were lower in Q3 than in Q2.

During the quarter, the increase in deposits was primarily used for funding advances, while the rise in investments was only a net Rs 500 crore or so.

The scorching pace of growth in advances has taken its toll on the capital adequacy ratio, which fell to 9.4 per cent in December, compared with 10.9 per cent in September. Small wonder the bank is raising capital.

The bank continues to have a negligible level of non-performing assets and its fee income has been growing rapidly. As pointed out above, a few concerns seem to have surfaced in the last quarter.

But the pace and quality of the bank's growth has been enough to allay all concerns, as seen from the stock going up on Monday.

Pharma firms

The government's recent notification that excise duty on all drugs and medicines will be payable at their retail price will increase pharma companies' excise liabilities considerably, despite the government setting tax abatement at 35 per cent (subject to certain provisions being met).

Pharma companies have been sourcing several medications at almost one-twentieth the MRP. An analysis of the top 10 pharma players' latest balance sheets reveals that outsourcing as a percentage of net sales is already quite large, especially for MNC players.

For Pfizer India outsourcing had improved 140 basis points to 16 per cent for the year ended November 2003 while for GlaxoSmithKline Pharma it was more or less steady at 23 per cent in CY 2003 vis-a-vis the previous year. In contrast, Ranbaxy had seen a dip of 200 basis points to 9 per cent for CY 2003.

Similarly, Cipla had seen a dip of 400 basis points to 14.4 per cent. The top six MNC pharma companies outsource on an average a quarter of their net sales. That percentage is much lower, at about 10 per cent, for the top four Indian pharma companies.

However, the new tax regime is not expected to result in a sudden sharp rise in prices. Domestic demand for pharma products has shown signs of being slack for several months.

As a result, larger players are waiting to see the reaction of their competitors before hiking prices, as they would not like to lose market share. Hence, MNC pharma companies are expected to be the biggest losers if product prices are not raised quickly.

The first week of 2005

Insight on the crash in the markets last week is now becoming clearer. EmergingPortfolio Fund Research reports that "The week ending January 5 was the worst week of outflows for equity funds since the week ending May 12, when investors withdrew $3.03 billion from equity funds."

In the week to January 5, 2005, $2.62 billion was pulled out, the entire outflow occurring in US and Global Equity funds. On both occasions, the markets were spooked by the fear of US rate hikes.

The good news is that dedicated emerging market funds "" both equity as well as bond funds "" saw inflows. Emerging Market equity funds took in $292 million while inflows into bond funds were $213 million. Global bond funds, however, saw outflows.

The pattern of funds flows suggests two trends "" one of skittish global or hedge funds rushing for the exits at the first scare, and another of dedicated long-term emerging market players who continue to pull in money even during bad times.

While the second trend will provide a strong floor to the market, the first will result in higher volatility.

The carnage across emerging markets is seen from the MSCI indices. This year, the MSCI Emerging Markets index was down 2.16 per cent on January 7, but it's down 4.28 per cent in US dollar terms (if the appreciation of the dollar is taken into account).

In Asia, the Chinese, Indian, Korea and Taiwan MSCI indices were all down, while the Latin American markets were a sea of red. The dollar's continued strengthening, in spite of weak economic data emanating from the US, suggests that caution is still called for.

With contributions by Amriteshwar Mathur