As HDFC looks to sustain growth, merger remains on track

 

• Analysts believe the company is taking the right steps ahead of the merger to eventually smooth integration with HDFC Bank

Housing Development Finance Corporation Limited's (HDFC) performance for the quarter ended December (Q3FY23) was modest and largely in line with analysts' estimates. Nevertheless, for investors in the stock, the progress of the merger with HDFC Bank Ltd is significant.

The management of HDFC said in its earnings call that the merger is on track. The hearing is to be held in the National Company Law Tribunal (NCLT) today. Post this, some regulatory requirements have to be taken care of.

Analysts at Macquarie Capital Securities (India) believe the company is taking the right steps ahead of the merger to eventually smooth integration with HDFC Bank. "It has reduced a certain proportion of non-compliant loan book with commercial banks as it prepares for merger with HDFC Bank," it said in its Q3 earnings review report.

Thus, the Q3 results failed on some counts. For instance, non-banking financial company's assets under management (AUM) grew at a healthy pace of 13% year-on-year (Y-o-Y), but the growth was lower than the 16% seen in the September quarter. Was. This can be attributed to the construction finance portfolio. But the management is confident that the company has a healthy pipeline and disbursements are likely in the coming quarters.

Another point to note was that HDFC's loan book is dominated by the personal loan portfolio, which accounts for around 82% of the total AUM. It registered a growth of nearly 17% y-o-y. The segment also witnessed a deceleration in growth of 20% in the September quarter. But the underlying demand for home properties is strong and hence augurs well for the company. The management attributed this to temporary sentiment on account of rising interest rates and this is likely to accelerate in the coming quarters.

Third, the company's operating expenses were higher, and according to management, this was due to higher staffing and legal expenses. As per ICICI Direct Research First Cut result note, “Opex growth was higher at 19.4% year-on-year. This is due to the upfronting of staffing expenses. Hence, the earnings ratio stands at 10.3% versus 9.7% in Q3FY22 and 9.1% in Q2FY23.

On the positive side, profits, and net interest income (NII) grew by about 13% each year. Net interest margin (NIM), though stable at 3.5%, was marginally lower by 10 basis points compared to the previous quarter, primarily due to increased cost of funds. However, it was within the range of management guidance to maintain at 3.3%-3.5%. One basis point is 0.01%.

The management also said that revaluation of loan books takes place with a one-quarter lag, whereas borrowings are instant for the company. In such a situation, it is expected that the company's margin will improve in the coming quarter. The company was well positioned in terms of asset quality.