HDFC Equity Research

Date of Research – 18 January 2016

Price – Rs. 1134.60

About the Company

India’s premier housing finance company, Housing Development Finance Corporation Limited (“HDFC” or “Company”) was established in 1977 with the primary objective of meeting a social need of encouraging home ownership by providing long-term finance to households. HDFC’s product range today includes loans for purchase and construction of a residential unit, purchase of land, home improvement loans, home extension loans, non-residential premises loans for professionals and loan against property, while its flexible repayment options include Step Up Repayment Facility (SURF) and Flexible Loan Installment Plan (FLIP).

HDFC’s subsidiaries include HDFC Developers Ltd, HDFC Investments Ltd, HDFC Holdings Ltd, HDFC Trustee Company Ltd, HDFC Realty Ltd, HDFC Property Ventures Ltd, HDFC Sales Pvt Ltd, HDFC Ventures Trustee Company Ltd, HDFC Venture Capital Ltd, HDFC Ergo General Insurance Company Ltd, HDFC Standard Life Insurance Company Ltd, GRUH Finance Ltd, HDFC Asset Management Company Ltd and HDFC Bank Ltd.

HDFCs distribution network spans 289 outlets, which include 71 offices of its wholly owned distribution company, HDFC Sales Private Ltd. In addition, the Company covers over 2,400 locations through outreach programmes. The Company also has offices in Dubai, London and Singapore and service associates in the Middle East region, to provide housing loans and property advisory services to non-resident Indians (NRIs) and persons of Indian origin (PIOs).

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations35,948.1840,753.1748,315.6951,606.40 61,034.35 
Expenses28,465.4515,313.9719,516.4921,228.14  26,376.95  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)7,482.7325,439.2028,799.2030,378.26  34,657.40
Depreciation54.2046.8546.63120.40  107.98  
Finance Costs0.0016,607.8918,710.2920,295.60  21,953.15  
Other income38.7561.3974.341,650.71  53.28  
PBT7,467.288,845.8510,116.6211,612.97  12,649.55  
Tax2,002.032,358.343,165.703,639.34  4,020.79
PAT (before Minority Interest and share of Associates)5,465.256,487.516,950.927,973.63  8,628.76  
Profit/ (loss) attributable to Minority Interest341.80454.89482.72527.99  797.02  
Share of profit / (loss) of Associates(1,516.27)(1,915.20)(2,294.42)(2,744.62) (3,219.38) 
Consolidated Profit / (Loss) for the year6,639.727,947.828,762.6210,190.26  11,051.12  

Profitability Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016 FY 2017
Operating Profit Margin Ratio20.8262.4259.6158.87  56.78 
Net Profit Margin Ratio15.2015.9214.3915.45  14.14 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital295.39309.27312.10314.94315.97 
Reserves & Surplus24,128.5931,751.0837,262.5144,756.6950,533.61 
Money received against warrants51.10
Net worth (shareholders funds)24,423.9832,060.3537,574.6145,071.6350,900.68 
Minority Interest819.531,071.471,423.881,820.082,325.97 
Policy Liabilities31,422.5435,086.0945,003.2554,924.2861,215.25 
Long term borrowings77,447.4793,618.5391,757.781,04,545.721,18,782.38 
Current liabilities75,526.8386,528.391,17,488.941,38,387.991,59,077.93 
Other long term liabilities and provisions2,963.623,583.403,970.404,544.164,407.87 
Deferred Tax Liabilities15.82231.32970.41 
Total Liabilities2,12,603.972,51,948.232,97,234.683,49,525.183,36,465.24 


Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets670.91697.96837.691,291.401,399.15 
Noncurrent Investments43,355.4353,616.2465,377.2686,887.5995,464.42 
Current assets33,537.0136,239.3942,731.4543,658.2551,059.07 
Long term advances and other noncurrent assets1,34,208.741,60,549.961,87,439.352,17,481.582,49,551.86
Deferred Tax Assets654.35659.60663.3418.5518.18 
Goodwill on consolidation (net)177.53185.08185.59187.81187.81 
Total assets2,12,603.972,51,948.232,97,234.683,49,525.183,36,465.24 

Efficiency Analysis

ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROE / RONW22.3788.7321.1519.4415.67 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016 FY 2017
Total Income from Operations (Rs. Cr.)35,948.1840,753.1748,315.6951,606.40 61,034.35 
Growth (%)20.11 %13.37 %18.56 %6.81 % 18.27 % 
PAT (Rs. Cr.)5,465.256,487.516,950.927,973.63  8,628.76
Growth (%)21.73 %18.70 %7.14 %14.71 % 8.22 % 
Earnings Per Share – Basic (Rs. )43.6351.0155.8164.07 68.87 
Earning Per Share – Diluted (Rs. )43.0950.6155.3063.59 68.30 
Price to Earnings19.1617.3320.8817.39 22.74 

Dividend History

The Company has maintained an average dividend yield of 1.42 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. HDFC’s average current ratio for the last 5 financial years is 0.41 which is satisfactory for a company which is primarily in the business of finance and lending.

Long Term Debt Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

HDFC’s average long term debt to equity ratio over the last 5 financial years has been 2.68 times which indicates that the Company operates with a high level of debt. A high long term debt to equity ratio is normal for a company which is primarily engaged in the business of finance and lending.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

HDFC’s average interest coverage ratio over the last 5 financial years has been 1.26 times which is optimal for a Company which is in the business of finance and lending.

Ownership pattern

HDFC is a professionally managed Company with no clear promoter group. Many large financial institutions hold varying amounts of stakes in the Company but no one in particular exercises significant influence in decision making which gives the management enormous freedom and autonomy in decision making.

In its latest stock exchange filing dated 31 March 2017, institutional holding in the Company stood at 88.02 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.