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Tight control over overheads and faster growth in other income helped HDFC beat market estimates during the March 2013 quarter.
However, this raises concern about the sustainability of HDFC's earnings momentum in FY14 given the moderation in loan growth and falling spreads on loans. HDFC reported net profit of Rs 1,555.21 crore on standalone basis during the fourth quarter of FY13, higher by 17.3 per cent over the corresponding period in the previous year. This was five per cent higher than Bloomberg consensus estimates and the stock rallied by three per cent after the news broke.
The company's core business of mortgage lending, however, faces slowdown, with interest income up 15.7 per cent during the fourth quarter, a sharp deceleration from the growth visible in the first nine months of FY13. Interest income had grown by 24 per cent during the April-December 2012 period, suggesting marked deceleration in the demand for home loans.
For the full financial year, HDFC's interest income was up 21.9 per cent. The mortgage lender is also facing heat from high interest cost and rising competition from commercial banks. This was evident in the interest expenses that continued to grow faster than interest income, putting pressure on margins.
Interest expenses were up 17 per cent during the fourth quarter and 24.5 per cent during FY13, higher than the corresponding growth in interest income. The net interest margin declined 19 basis points to 4.21 per cent in the quarter from 4.4 per cent a year ago. The trend is not likely to reverse anytime soon given the central bank's tough stance on inflation control and rising competition from banks in a slowing market.
Poor show in the core business was more than offset by buoyancy in other income. Non-interest income expanded 33.6 per cent during the fourth quarter, aided by a 50 per cent jump in treasury income and 47 per cent higher income from fees and other charges. Other income accounted for 8.3 per cent of HDFC revenues during the fourth quarter against 7.2 per cent a year ago.
At its closing share price on Wednesday, HDFC was trading at 28 times its net profits during FY13, making it one of the most expensive stocks in the financial services space. "Most of the good news is already factored in its share price, putting a cap on the upside for a new investor. At best, it's likely to be a market performer and we remain neutral," says Vaibhav Agrawal, banking analyst at Angel Broking.
