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HDFC Results: Encouraging?

While I’m not a great fan of HDFC, the mortgage originator has shown some promise. The latest results, on the face of it, show a 23% rise in EPS over Q1 FY10. But:



  • Revenues are stagnant for two years now. Around 2,700 to 2,800 crores, this is disturbingly static.
  • Even The Trailing Twelve Month EPS (TTM EPS) has hung around the 80s for the last two years, and zoomed up to 100.3 on the back of a great march quarter – where the blip seems to be in a lower interest cost (1550 cr. versus average of 1700 cr in prior and next quarter)
  • TTM EPS has grown a miserable compounded 6% in the last two years.
  • With interest rates going up will the cost of funds for HDFC go up? It most definitely will, but then so should revenue because most of their loans are floating rate. But they are providing loans at fixed rate for two years (at 8.25% till 2011, and then 9.25% for a year). Now it’s about managing the spread – if rates go up too fast, the spread will contract. They’ve borrowed 73,000 cr. so if they pay even 50 bps more in interest that’s a 350 cr. hit on profit, about 15% of their annual profit.
  • HDFC’s annual report states that the total loan book was around 98,000 crores, and their total borrowings were 95,500 crores. (They have investments as well).

My thoughts:

  • I’ve always maintained this share is overpriced but it seems to be a stock market darling. Have largely lost money going short this stock – though I’ve made some as well, I would not recommend going short without deep pockets.
  • At Rs. 3040, the P/E is 30. EPS hasn’t grown at even close to 30% for the last 8 quarters. If the March 09 figure turns out to be a blip (the EPS was higher by 9 rupees on a freaky lower interest component) they will go back to the 80s on 12 month EPS, which takes the P/E even higher.
  • The insurance and Asset management subsidiaries will be in some trouble as business plans change, and the regulators efforts to cut commissions will seriously hit bottomlines in the short term. Now I’m very fond of HDFCs AMC service, but they must make their businesses far more efficient if they really want to stay in the game. That will require some short term loss-making and a culture change, of sorts.
  • We don’t know the metro/large city versus smaller city mix. Current prices seem insanely high in the large cities, and I’m not sure how they’ll continue to grow at the same pace. A drop in growth or a reversal of home prices will not just stunt HDFC’s growth, it’s likely to increase their non-performing loans.
  • The upside is that things continue to grow, house prices continue to rise, salaries keep going up and more and more people start borrowing for mortgages. I see some of this happening in smaller towns.
  • On a technical note the chart has serious strength – it’s near or at all time highs.


  • Oracle says:

    >Something is really missing in whole calculation like who is contribution what amout in that Rs 100.3. They got some stake in HDFC Bank which doing really good.( not sure how much but must be around 25-30%)( Even they- HDFC Bank go too high PE but they are growing to support such high PE). Some stakes HDFC Std Life and HDFC AMC is also not bad. That might be trick we are missing as common or small investors. In future they want to list AMC and Life Insurance subsidy. They may never sell their shares in HDFC Bank and might buy Citibank's 10% if they got money and Citi want to sell. But yes, lending, (home loans) as thier main bread and butter is not in good shape as Indian don't like to borrow much and even if they borrow, they will clear off debt as soon as they can.

  • Anonymous says:

    >HDFC valuations reflect their holdings as well, so calling it expensive/cheap based only on HDFC financials is quite short-sighted. But I guess this blog is based on a traders perspective not fundamental analysis perspective.

  • Deepak Shenoy says:

    >Oracle – 23%. APpropriate amounts will be added in their consolidated results – the amount, net of losses in the insurance subsidiaries, profit in the AMC etc. is about 500 cr.

    Anon: The sum of the parts is also interesting, but the financials of the core business need to make sense as well, consolidating its earnings. ANything that's "valued" richly because it has a potential market value (but is otherwise not liquid) is like valuing land banks – it's a dumb thing to do in a large scale. Take the HDFC bank stake. They own about 23% of HDFC bank, which is worth 90,000 cr. It should be valued at 20,000 cr. but it can't be; they simply can't get that value should they try to sell it. You can discount it to whatever level, and that might work for you, but there is no intent to sell it, therefore the asset should generate (consolidated) EPS.

    Fundamental analysis can take on different hues. I only choose what doesn't fool me (Insurance valuations for instance are ridiculous)

  • Anonymous says:

    >The promoters and the brand value plus conservative approach in landing plus growing since its inception. This are all intangibles creates a good reputation.

    And in stock market cost of certainty is very high.

    While the whole market fund manager, FII talk about P/BV you talk about PE.

    You go against the crowd calculation then complain why the frig the price is not crashing.

  • Deepak Shenoy says:

    >Heck, I complain about that for stocks like Infoedge and Infosys also – not just HDFC. There is no point giving high valuations for "reputation" or "certainty". I can understand a 10% premium for that. But not a 50-100% premium over the rest! At these rates even the public sector banks are a far better bet in the long term.

    Crowds don't necessarily compute. A good reason for a lot of stocks like HDFC going up is simply fund flows; a lot of money that can't go elsewhere (FIIs aren't allowed to pile on to banks for instance). In the longer term this advantage goes away.

    Price to Book is ultra subjective; and even if you look at P/BV the banks are better.

  • Anonymous says:

    >Damn thing is the market don't care what me or you think about stock valuation. Once RJ had said what is "FAIR VALUE" is there any measurement that a particular stock should trade only at some valuation.

    i am amazed that you would say only 10% premium should be given. Is there any book which gives the exact matrix i would love to read it.

    So if you know that the fund is flowing in HDFC why short it. Why play the fools game. It is considered a one of the safest stock Why short it in the first place.
    Why not short suzlon's of the world.

    PSU always trades lower then there private counterpart. so a private sector bank like yes bank or hdfc bank will trade at higher PBV then sbi and bob because of gov control and dividends and policy restriction etc etc. plus because of babu's in gobernment companies. Common knowledge in the markets.

    In the long run we are all dead. 🙂

    You could keep shorting HDFC after all its your money.

    I hope i have given enough gyaan since i have nothing to do today.

  • Deepak Shenoy says:

    >Which is true – the market is supreme. At this point the stock's close to it's all time high (as is HDFC Bank too)

    As for shorting, there are points to short in the short-term, which don't make sense in this discussion. I've taken a few fundamental short bets on this stock which in general haven't worked (one did, one did not and another was sorta even)

    And no wonder you want a book reference for a 10% premium – that's why you care so much about book value! 🙂

    PSBs nowadays operate very well compared to the private sector. They seem to do better in terms of loan quality and are better priced.

    There's a difference in valuation. I would suggest that if you have a different way to value it, you should write about it. No point arguing on whether I'm being a fundamental analyst or a technical one – i trade largely technically, though I keep an eye for fundamentals too. HDFC is just not promising fundamentally. Technically it's a solid buy under most circumstances.