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:

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  • 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.

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