HDFC: Sell

Recommendation: Sell

Sanjiv Shankaran

AIDED by a healthy growth in housing loans over the last few years, HDFC announced a good financial performance for the first half of 2001-02.

Income: Likely to remain stable

In the first half (April-September) of this financial year, HDFC registered an operating income of Rs 1,304.56 crore, up Rs 165.94 crore (14.57 per cent) over the corresponding previous period.

Given the employment and business creating capacity of the construction business, housing loans are likely to continue receiving government incentives in the foreseeable future. In this backdrop, HDFC's income arising out of its core business of housing loans seems set to grow round about the current level of 15 per cent.

Interest cost under control

Interest cost is the most significant expenditure for HDFC. The company raises about 85 per cent of the funds it deploys through borrowings, of which deposits is the biggest constituent.

The current soft interest environment has kept a check on the growth of interest expenditure in absolute terms. Of greater significance is that HDFC's top-notch credit rating has ensured that the company is able to raise funds at a relatively low cost and, thereby, derive considerable competitive advantage.

HDFC has notched a steady improvement in its financial statements over the last few years on the back of a surge in demand for housing loans. In particular, over the last four years, its performance has been noteworthy compared with the problems that seem to besiege the rest of the financial sector.

In the first half of this financial year, HDFC's interest expenditure was Rs 934.83 crore, up Rs 114.18 crore (13.91 per cent). The growth in interest was lower than the growth in income.

Rising profitability

HDFC managed to increase the profitability of operations in the first half. The operating profit was Rs 314.90 crore, up Rs 41.01 crore (14.97 per cent) over the corresponding previous period. The rise in the operating profit was accompanied by an increase in operating profit margin. The OPM was 24.08 per cent against 23.97 per cent in the previous period.

Aided by the money flowing in through the sale of 26 per cent stake in its asset management company to Standard Life Assurance, HDFC's net profit margin was even more impressive.

The net profit in the first half was Rs 252.55 crore, up Rs 35.75 crore (16.48 per cent) over the previous period. The net profit margin was 19.31 per cent, far higher than the 15.68 per cent the previous financial year.

The earnings per share (EPS) was Rs 20.72, higher by 15.68 per cent over the previous period.

Outlook

HDFC has been among the better investments in the equity market over the last few years. A dominant position in a stable business, top-flight management and a low level of bad loans have made the company one of the highly valued stocks in the financial sector.

Going ahead, the equity market has begun to factor in HDFC's likely returns from investments in such exciting lines as insurance, asset management and IT-enabled services. This dimension, when coupled with the high flow of foreign portfolio investment -- 44 per cent of equity capital now -- has helped HDFC's share price defy the downtrend in the broad market.

The key question now is if HDFC, at its current share price of Rs 651, is worth an investment. No, because the upside from Rs 651 seems limited.

The risk of putting in Rs 651 for every share appears too high when the current valuation seems to adequately capture the company's strength in housing loans and the possible returns from other lines of business.

HDFC has decided to increase the FII ceiling to 74 per cent from the earlier 49 per cent. But it seems unlikely that the FII funds would flow into the company as in the recent past. With the absence of new triggers, the HDFC stock may be avoided for now.

Pic.: Mr Keki Mistry, Managing Director, HDFC.