First Global opines that to reach a 20 per cent ROE, additional assets have to be created over and above the normal asset growth rate. This translates to a growth in the rate of lending to 32 per cent from the usual 20 to 21 per cent. This in First Globals estimates is impossible. Since the returns on the non housing assets is higher than that on housing assets, HDFC employs 25 per cent of its assets in the former. But to reach the 32 per cent growth target, it will have to find financial assets worth Rs 7.8 billion. This actually means that the asset creation has to be about 83 per cent more than that possible in the most realistic scenario.
Also if the quality of assets is considered, in the present easy liquidity situation where the interest rates are low, good quality assets at reasonable yields are scarce. And with fierce competition among financial institutions and banks, there will be no such asset addition possible at twice the growth rate.
On the funding side, it may not be difficult for HDFC to raise a large amount. But it may not hold good in the long term as India remains a capital deficient economy. The tax concession on which the ROE is largely dependent, may also be withdrawn in the future. So, there remains a serious doubt about how HDFC will be able to achieve its targetted ROC of 20 per cent.
