Housing Development Finance Corporation
Worth taking shelter
While the earnings growth in core housing finance business is expected to increase, value of its investments in banking, insurance and asset management businesses will gallop in the expected favourable environment
| Buy | Housing Development Finance Corporation |
| BSE Code | 500010 |
| NSE Code | HDFC |
| Bloomberg | HDFC@IN |
| Reuter | HDFC.BO |
| 52-week High/Low | Rs 3257/ Rs 1397 |
| Current Price | Rs 2842 (as on 16th January 2008) |
Housing Development Finance Corporation (HDFC), country�s premier housing finance company, is one of the few companies, which have been consistently growing at CAGR of 20% and is expected to improve this growth rate in future
Encouraging industry prospects
The industry continues to witness high demand largely driven by improved affordability on the back of rising disposable income, lower interest rates (compared to high levels few years ago), tax incentives (interest and principal repayments deductible), increasing urbanization, favourable demographics and rapid rise in new households
Moreover at present, Indian housing finance industry mainly caters to the organized or the employed sector and traditionally confined to metros and other big cities. The industry has to go a long way to cover vast populace of semi urban and rural towns that live outside the formal sector.
Further property prices are not likely to impact the housing demand, since in India people do not usually buy a house for investment, they usually buy a house for self-occupation. So when people are buying a house for self-occupation, what they are looking at is whether they can afford to buy a house or not. Hence whether the price goes up a little later on or goes down a little is not going to matter much.
HDFC is the most competitive and efficient player
HDFC has always been dynamic as well as quality-conscious with respect to resource mobilisation as well as its lending programme. It enjoys one of the most coveted reputation of having zero NPAs for past many years.
HDFC�s distribution network spans 243 outlets that include 49 offices of HDFC�s distribution company, Home Loan Services India Private Limited (HLSIL). In addition, HDFC covers over 90 locations through its outreach programmes. HDFC�s marketing efforts continue to be concentrated on developing a stronger distribution network. Home loans are also marketed through HLSIL, HDFC Bank Limited and other third party Direct Selling Agents (DSA). To cater to non-resident Indians, HDFC has an office in London and Dubai and service associates in Kuwait, Oman, Qatar, Sharjah, Abu Dhabi, Al Khobar, Jeddah and Riyadh in Saudi Arabia.
Encouraging financial performance
For the six months ended Sep�07, HDFC reported 40% increase in Income from operations at Rs 3713.79 crore. Gross profit increased by 33% to Rs 1095.15 crore. While the PBT before exceptional item stood at Rs 1087.45 crore, up by 34%, the half-year reported exceptional income of Rs 313.25 crore (as compared to Rs. 32.98 crore) on account of profit on sale of investment in an associate company, Intelenet Global Services Private Limited. After providing Rs. 381.50 crore for taxes, the profit after tax increased by 53% to Rs 1019.20 crore.
As at September 30, 2007, the total assets of HDFC stood at Rs. 72,665 crore as against Rs. 56,496 crore as at September 30, 2006 � an increase of 29%.
Loan approvals during the six-month period ending September 30, 2007 amounted to Rs. 18,948 crore as compared to Rs. 14,729 crore, in the corresponding period last year, representing a growth of 29%. Loan disbursements during the period ending September 30, 2007 amounted to Rs.14,275 crore as compared to Rs.11,280 crore in the corresponding period last year, representing an increase of 27%.
The loan portfolio (including loans outstanding and investments in debentures and inter-corporate deposits for financing real estate related projects) as at September 30, 2007 amounted to Rs. 63,446 crore as against Rs. 51,332 crore as at September 30, 2006, representing an increase of 24%.
Comfortable capital adequacy ratio
HDFC�s capital adequacy ratio stood at 17% of the risk weighted assets, as against the minimum requirement of 12%. Tier 1 capital adequacy was 12.4% as against a minimum requirement of 6%.
Strategic investments will add to the core business growth
HDFC has interests in banking, insurance and asset management.
All the subsidiaries are currently doing extremely well.
HDFC Standard Life
Its life insurance company (HDFC Standard Life) is a tie up with Standard Life Assurance Company, U.K. HDFC holds 74% of the equity of HDFC-SL.
The company earned total premium income of Rs 2856 crore for FY 07 (against Rs 1570 crore). Its first half growth in total premium is 79%.
Funds under management of group new business increased by 109% as at September 30, 2007 as against the previous year.
It has market share of 8.3% (private sector) and 3.7% (overall) in terms of Effective Premium in H1 08.
HDFC Asset management
HDFC Asset management has Tie-up with Standard Life Investments (SLI). HDFC holds 60% of HDFC Asset Management.
The company earned a Profit After Tax of Rs 67.50 crore for FY07 and paid a dividend of 100% for FY07 to equity shareholders.
Total assets under management as at September 30, 2007, stood at Rs 52800 crore, which is inclusive of portfolio management and advisory services of Rs 11400 crore.
HDFC Property fund
HDFC Launched in March 2005 its first property fund.
Its first scheme was HDFC India Real Estate Fund having fund corpus of US $ 250 million. It was a domestic 7-year close-ended fund managed by Funds managed by HDFC Venture Capital
General Insurance
In October 2007, HDFC and ERGO (Germany) entered into shareholders� agreement whereby ERGO will acquire 26% of HDFC General Insurance Company Ltd. The company offers Auto Insurance, Home Insurance, Group Accident Insurance, Group Travel Insurance, Commercial Insurance, which includes Fire and Marine and Specialty Insurance Products like Directors & Officers Liability.
The company had Achieved Gross Written Premium of Rs 197 crore.
HDFC Bank
HDFC also has 24% equity stake in HDFC Bank, which has one of the best technology and finest quality of assets with one of the best consistently high growth rates.
Investments
HDFC also has lot of investments in many listed companies like IDFC, Gruh Finance, Hindustan Oil Exploration, Siemens etc which are worth Rs 1800 crore at current market rates. Additionally its investments in HDFC Bank is worth Rs 6900 crore at current market rates.
Outlook
HDFC�s core business profitability numbers are on an upswing due to less intense competition from banks (due to higher reserve requirements increasing their costs and regulatory discouragement towards lending to realestate/retail sector) and some easing in funding costs. The insurance company is growing remarkably faster and the bank�s growth also shows signs of acceleration.
Reasonable valuation
HDFC is expected to report standalone adjusted EPS of Rs 64.8 for FY 2008 and Rs 83.1 for FY 2009. At Rs 2842, P/E is just 34 times its FY 2009 standalone adjusted earnings, which is reasonable in view of the expected sustained growth of 25% in earnings and expected continued growth in value of its investment in banking, life insurance, general insurance, property fund and asset management businesses (whose combined value can be Rs 750-Rs 1000 per HDFC�s share).
| | 0503(12) | 0603(12) | 0703(12) | 0803 (12P) | 0903 (12P) |
| Income from operations | 3400.6 | 4265.54 | 5842.52 | 7887.40 | 10411.37 |
| Other Inc. | 9.48 | 12.85 | 20.76 | 14.00 | 16.00 |
| Total Inc. | 3410.08 | 4278.39 | 5863.28 | 7901.40 | 10427.37 |
| Interest Exp. | 1959.43 | 2491.13 | 3666.85 | 5096.92 | 6778.91 |
| Other exp. | 175.17 | 211.27 | 244.17 | 285.68 | 331.39 |
| Gross profit | 1275.48 | 1575.99 | 1952.26 | 2518.80 | 3317.08 |
| Dep. | 18.69 | 18.69 | 17.46 | 17.60 | 18.50 |
| PBT before EO | 1256.79 | 1557.30 | 1934.80 | 2501.20 | 3298.58 |
| EO | 0.00 | 0.00 | 32.98 | 313.25 | 0.00 |
| PBT | 1256.79 | 1557.30 | 1967.78 | 2814.45 | 3298.58 |
| Taxation | 220.2 | 300.00 | 397.40 | 759.90 | 956.59 |
| Net profit | 1036.59 | 1257.30 | 1570.38 | 2054.55 | 2341.99 |
| EPS*(Rs) | 36.8 | 44.6 | 54.8 | 64.8 | 83.1 |
| * Annualised on current equity of Rs 281.94 crore.
Face Value: Rs 10
Figures in Rs crore EO: Extraordinary items
*EPS is after excluding EO and relevant tax
(P): Projections
Source: Capitaline Corporate Databases |
| | 0709(3) | 0609(3) | Var. (%) | 0709(6) | 0609(6) | Var. (%) | 0703(12) | 0603(12) | Var. (%) |
| Income from operations | 1888.60 | 1446.69 | 31 | 3713.79 | 2659.43 | 40 | 5842.52 | 4265.54 | 37 |
| Other Inc. | 3.90 | 9.54 | -59 | 7.34 | 12.35 | -41 | 20.76 | 12.85 | 62 |
| Total Inc. | 1892.50 | 1456.23 | 30 | 3721.13 | 2671.78 | 39 | 5863.28 | 4278.39 | 37 |
| Interest Exp. | 1223.75 | 913.59 | 34 | 2467.13 | 1715.00 | 44 | 3666.85 | 2491.13 | 47 |
| Other exp. | 82.31 | 68.64 | 20 | 158.85 | 135.31 | 17 | 244.17 | 211.27 | 16 |
| Gross profit | 586.44 | 474.00 | 24 | 1095.15 | 821.47 | 33 | 1952.26 | 1575.99 | 24 |
| Dep. | 4.00 | 3.89 | 3 | 7.70 | 7.61 | 1 | 17.46 | 18.69 | -7 |
| PBT before EO | 582.44 | 470.11 | 24 | 1087.45 | 813.86 | 34 | 1934.80 | 1557.30 | 24 |
| EO | 313.25 | 0.00 | 100 | 313.25 | 32.98 | 850 | 32.98 | 0.00 | 100 |
| PBT | 895.69 | 470.11 | 91 | 1400.70 | 846.84 | 65 | 1967.78 | 1557.30 | 26 |
| Taxation | 249.30 | 102.09 | 144 | 381.50 | 182.00 | 110 | 397.40 | 300.00 | 32 |
| Net profit | 646.39 | 368.02 | 76 | 1019.20 | 664.84 | 53 | 1570.38 | 1257.30 | 25 |
| EPS*(Rs) | 59.6 | 52.2 | | 56.1 | 45.3 | | 54.8 | 44.6 | |
| * Annualised on current equity of Rs 281.94 crore.
Face Value: Rs 10
Figures in Rs crore
Source: Capitaline Corporate Databases |
