Housing Development Finance Corp. Ltd (HDFC), India’s largest mortgage company, posted a 32.71% rise in net profit in the December quarter, riding on income from the sale of a part of its investment in Infrastructure Leasing and Financial Services Ltd (IL&FS).
IL&FS is a finance company promoted by HDFC along with Central Bank of India and the erstwhile Unit Trust of India (UTI).
Profit rose to Rs890.88 crore in the quarter ended December from Rs671.25 crore in the year earlier.
Excluding the sale of the 10% IL&FS stake, profit growth is 16.74%. The year-ago figure includes a Rs51.38 crore profit on investments.
However, the figures are not strictly comparable as there have been changes in tax norms during this period.
A more accurate way of judging HDFC’s performance could be the rise in its net interest income—19%.
“While the operational performance has been encouraging, a big difference was caused by profit on sale of investments which turned inRs167 crore compared to Rs59 crore in Q2FY11 and Rs51.4 crore in Q3FY10,” Deutsche Bank research analysts, Dipankar Choudhury and Manish Shukla, wrote in a company alert just after HDFC announced its earnings.
They recommend that investors hold on to the stock.
HDFC’s earnings per share increased to Rs5.91 from Rs4.53 last year.
The firm’s shares lost 3.95% to end at Rs641.55 on Friday on the Bombay Stock Exchange even as the exchange’s 30-share benchmark Sensex ended 1.68% lower to close at 18,860 points.
Conrad D’souza, senior general manager, management services and investor relations, said demand for home loans, especially from smaller Indian cities, where property prices have not risen sharply, such as Ahmedabad, Baroda and Ghaziabad, have helped business in the quarter.
“Both approvals and disbursements from the retail side have been stronger than from companies. In the first nine months, retail disbursements rose 38%, while disbursements for companies was only 25% (higher),” he said.
HDFC lends to both individuals as well as real estate companies.
D’souza said demand for houses has been particularly robust in smaller towns.
The firm managed to maintain its margins—the difference between its lending rate and the rate at which it borrows—at 2.33%, in line with analyst expectations.
Borrowing for HDFC is more expensive because, unlike banks, it does not have access to low-cost current or savings account deposits.
Rates have gone up this quarter because the Reserve Bank of India (RBI) increased its policy rate by 25 basis points (bps) to 6.25%. One basis point is one hundredth of a percentage point.
During this quarter, HDFC’s home loan rate rose by 75 basis points.
Following this, the 10-year government bond yield has risen 1.04 percentage points to 7.93% in the October-December period.
“Borrowing rates have gone up 125 basis points in the quarter, but we have managed to hold on to margins because we could pass on the increase to customers. Also, the fact that we borrowed in different tenures helped,” D’souza said.
On Friday, HDFC sold another 10-year bond worth Rs400 crore at 9.30%, D’souza said, adding that short-term rates (of one year and below) have risen more sharply, by 250 bps, in the last quarter. HDFC’s loan book rose to Rs1.09 trillion in December 2010 from Rs90,410 crore in December 2009.
The company said it has drawn down Rs272 crore from its additional reserves to make up for the increase in provisioning as sought by RBI.
In November, RBI increased standard asset provisioning by banks for teaser home loans to 2% from 0.40%. Teaser loans are those where a borrower is offered a relatively cheaper rate for the first few years and after that the rates go up in sync with prevailing interest rates.