Housing Development Finance Corporation
Recommendation: Hold
Price target: Rs.3500
Q1FY2010 results: First-cut analysis
Result highlights
HDFC has reported a bottom line of Rs564.9 crore for Q1FY2010, indicating a 20.6% year-on-year (y-o-y) growth. The bottom line was below our expectation of Rs588.2 crore, primarily due to the lower than expected top line performance during the quarter.
The net interest income came in at Rs668.6 crore, indicating a muted growth of 2.5% year on year (yoy). The top line performance was weaker primarily due to a sharper than expected contraction in HDFC's net interest margin (NIM).
The calculated net interest margin (NIM) for the quarter stood at 2.75%, indicating a contraction of 39 basis points yoy. The contraction in the NIM, despite a 57-basis-point y-o-y improvement in the yields on loans, points towards a weaker other interest income (down 9.5% yoy) that led to a flattish performance at the blended yield level.
The other operating income witnessed a spike and stood at Rs161.5 crore, helped by a robust increase in the surplus from the deployment in mutual funds, the fee income and the capital gains. In line, the cost-to-income ratio improved to 10.2% from 11.6% a year ago. Further, the growth in the operating expenses was contained at 4.2% yoy to Rs90.4 crore. This led to a respectable 20% y-o-y growth in the operating profit. Importantly, the core operating profit growth was much weaker at 12.4% yoy.
The demand environment for residential mortgage space has witnessed some improvement recently, though a conclusive recovery remains illusive. Besides the demand side challenges, HDFC continues to face stiff competition from public sector banks in the residential mortgage space. Driven by the corporate segment the approvals and disbursals grew by 20.6% and 25.6% yoy respectively in Q1FY2010, better than the growth during Q4FY2009, driven by corporate segment.
In line with the seasonal trend observed, the asset quality during Q1FY2010 witnessed some deterioration on a sequential basis. In percentage terms, the non-performing loans (90 days overdue) came in at 0.98% compared with 0.81% in the previous quarter. Importantly, the asset quality improved on a y-o-y basis in relative terms.
While our channel check suggests some pick-up in residential purchase inquires as well as eventual purchase, we believe that these are still early days to conclusively pronounce a recovery in the housing space. Even when the recovery will unfold, it is likely to happen at a slower pace. At the current market price of Rs2,410, the stock trades at rich valuations of 21.3x FY2011E earnings per share (EPS) and 4.1x FY2011E book value per share, implying that the anticipated improvement in the demand environment is largely priced in. We maintain our Hold recommendation and price target (of Rs.3500) on the stock. We shall follow up with a detailed note soon.
NIKUL PATEL
09727765995/ 09998144022
tigernifty@yahoo.
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