HDFC Bank Ltd has the reputation of delivering 30% growth in net profit, quarter after quarter, year after year.

This time, in the middle of all the talk about a slowdown in credit, the impact of high-cost deposits and expectations of increased bad loans, the bank has broken with tradition and delivered a 40.1% rise in net profit in the September quarter.

At first sight, net interest margins appear to have fallen to 4% from 4.2% in the June quarter, but Paresh Sukthankar, executive director, HDFC Bank, points out that that’s because the margins have been adjusted for the premia on amortization of securities in the held-to-maturity category.

In effect, he’s saying that’s an accounting adjustment and margins have actually remained exactly the same as in the June quarter. That’s partly because the bank raised $1 billion (Rs3,930 crore) in capital during the quarter.

Volumes too have gone up, with net advances increasing at a year-on-year rate of 40% in the September quarter, compared with a growth of 33% during the June quarter. Sukthankar says that while there has been de-growth in sectors such as two-wheeler loans, other auto loans and credit cards have done well. Deposit growth has been very strong at 43.5%, but part of that is due to Rs3,000 crore held in current accounts as banker to various initial public offerings (IPOs).

There has, however, been a sharp deceleration in “other income" growth, particularly in foreign exchange/derivative revenues. But then that’s an item that varies sharply from quarter to quarter. Net non-performing assets (NPAs) have remained at 0.4%, although the management agreed that bad loans have gone up in certain categories.

Overall, however, the growth in lending has offset the growth in bad loans as a result of which the net NPA percentage has remained the same. For the future, Sukthankar doesn’t rule out a moderation in growth rates. Moreover, the recent lowering of interest rates by some banks during the festival season may also not reflect the future direction of interest rates.

Confirmation about the interest rate trend will have to await the Reserve Bank of India’s signals. But given HDFC Bank’s uncanny ability to deliver very predictable results, investors need not be worried.

Buyback prop

Mastek Ltd’s September quarter results illustrate that mid-cap firms would find it more difficult to manage the adverse operating environment the industry is facing. The company’s revenues grew by 18% on a like-to-like basis (excluding revenues from the Deloitte Consulting LLP joint venture (JV) last year, since the company sold its stake in the JV in March this year), almost in line with Infosys Technologies Ltd’s year-on-year revenue growth of 19%. But profit before tax and non-operating income was flat at last year’s level of Rs22 crore. Infosys managed to grow core earnings by 21% (adjusted for extraordinary items) on a year-on-year basis. Clearly, the toll of an appreciating rupee and wage inflation has hurt Mastek much more. Note that Mastek gets a majority of its revenues from Europe, and the North American region accounts for less than 30% of revenues.

So the impact of the rupee appreciation against the dollar should have been much less. But performance has picked up on a quarter-on-quarter basis. The order book position has risen by 14% on a sequential basis to Rs15 crore, although on a year-on-year basis, it’s down 12%. Revenues grew by 13% sequentially and profit before tax and non-operating income rose 16%.

Infosys, of course, saw a 27% sequential jump in core earnings after adjusting for the extraordinary earnout payment it made to employees of its consulting business. Yet Mastek shares moved up 13% on Friday, on account of the company’s generous buyback announcement. While the company’s share price prior to the buyback announcement was only Rs320, and the six-month average was less than Rs300 per share, the Mastek management has said that it will seek shareholder approval to buyback shares at a price up to Rs750 per share.

The company will spend Rs65 crore for the buyback, which means at current prices it would be able to buyback 1.7 million shares, or 10% of its free float. While a buyback from the open market is a tax-efficient way of returning cash to shareholders (dividends are taxed), the euphoria shown by the markets seems overdone.

Only one out of 10 shares held by minority shareholders will be bought back, and once the buyback is done, the Mastek will have been relieved of cash worth Rs65 crore.

So, the benefit of higher earnings per share and higher return on equity will be partly offset by the reduction in cash reserves. Of course, Mastek’s intent to buyback shares from the market will now provide a floor for the share price.

But once the buyback is out of the way, it will boil down to fundamentals, which aren’t very exciting based on the performance last quarter.

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