HDFC - Huge value unlocking from subsidiaries

HDFC (CMP Rs 1245) is a shareholder’s dream company. Deepak Pareikh the chairman of HDFC is considered the smartest financial minds around. While HDFC is known more as a mortgage lender the inherent value of business that this company holds is oblivious to the general investor.

The break up of the joint family system and the movement of people away from their ancestral homes in search of better jobs created huge demand for housing in the early 1990’s. While HDFC was quick to capitalize on this opportunity by extending housing finance the sheer pace of sustained growth at 25% to 30% for a major part of the last decade has created huge shareholder wealth. A snap shot of the company’s financial reflect the following:

Key highlights:

• Excellent management. Deepak Pareikh is a pioneer in the Indian Banking  Industry
• Huge scope for housing loan companies. Mortgages contribute to only 3% of GDP in India whereas it is 10-15% in South east Asian economies and about 50% in the US.
• Very high RoE of around 30%. HDFC has been expanding its RoE by almost 1% each year. Other ratios like the return on assets at 3% with a more then 2% spread are also very attractive..
• Inspite of a very high dividend pay out (40% of EPS) HDFC will continue to record a CAGR of more then 25%.
• Excellent loan portfolio with near 0% NPA.
• Unlike Banks HDFC has to maintain SLR only on public deposits
• Diluted equity only once over the past 10 years
• Huge value in subsidiaries which is yet to be unlocked.

Over the last decade HDFC has made significant investments in banking, insurance, BPO and AMC. Most of these businesses are now achieving traction and growing faster then the normal mortgage business of the parent. For HDFC earnings have continued to grow at above 25% and above for the past five years while these related diversifications show higher growth.

Recommendation: Investors trying to create a diversified broad based portfolio should buy HDFC. The stock has the potential to go up by 8 to 10 times in the next decade. Very rarely investors get stocks which they can buy and forget. HDFC is one of them.

       Source: Exchange websites & Brokerage reports

Basant: Fully endorse your views.  HDFC is one of my core hoildings to which I added during the recent carnage. What I find really impressive about the management is that they keep coming up with new revenue streams which pay off big time. For example, their recent foray into real estate mutual funds (they were the first entrant).

Not sure on that but with Deepak Pareikh you can be sure that whatever he does it would result in shareholder wealth.

Motilal Oswal in its recent report has reiterated a  buy on HDFC. Personally I think the HDFC twins are a jewels in a person's portfolio. These two stocks combinmed would grow 10 times over the next 10 years and investors should participate in these stocks with what ever percentage of their portfolio they wish to grow 10 times in 10 years.

Hi Basant

Chic: If you are trying to give  a makeover to your portfolio try doing so withe the targetted tsocks that have not moved. The other ones could be added in smaller doses.

HDFC has moved up about 21% to Rs 1503 from our initial discussion at Rs 1245. While this movement has taken some of the cream from the milk HDFC remains a top notch portfolio holding.

The Indian Mortgage demand has grown at over 30% in recent months. The rise in income and the general culture of a shift from the joint family system into nuclear families shall keep the demand roust for the next few years.

In face of the rising property prices HDFC has been very efficient with its processes. They have kept the operating costs at 43bps of assets and credit costs at just 5 bps of assets.

The interest margins at 2.15% have been more of a constant even in the backdrop of http://www.theequitydesk.com/forum/forum_posts.asp?TID=18 - interest rate movements  of the past few years. the margins have moved  in a range of 5bps over the last 5 years indicating the efficient fund management processes of the company.

The value unlocking created through its forays into insurance, asset management and commercial banking should create significant shareholder benefits over the medium term (2-3 years)

The life insurance business is growing premiums at over 100%YoY.

Hello Basanji,

Basantjee

HDFC looking strong offlate....reached 52 week high @ 1821.95 & closed today @ 1817-

Life insurers unfazed by high interest rates

New Delhi April 13

The hardening of interest rates in the economy does not portend sharp decline in life insurance industry's premium collection growth rates in the current fiscal, say captains of the private insurance companies.

The popular view is that rising interest rates would not hurt industry growth although some slowing down may happen during the current fiscal.

The life insurance industry recorded a 120.41 per cent growth in new premium collection for the period April-February 2007 to Rs 57,937 crore from Rs 26,286 crore in the same period in the previous year.

"There will be some reallocation of savings pool. The share of insurance in the savings is unlikely to drop. We expect more flow into fixed deposits. At the same time, asset allocation in property, gold and mutual funds will come down and some will come into insurance. Net-net, there will be no hit on insurance," Ms Shikha Sharma, Managing Director, ICICI Prudential Life Insurance Company, said.

She said that the life insurance industry was "crowded" and the current fiscal would see growth rate of 30-40 per cent. "The over 100 per cent growth seen last fiscal (up to February) is clearly unsustainable. You can't grow at the same rate on this higher base. Last financial year, a number of insurance companies expanded their distribution footprint. Moreover, a lot of people bought into ULIPs in the first quarter," Ms Sharma said.

HDFC Standard Life Insurance's Managing Director, Mr Deepak Satwalekar, told Business Line that rising interest rates would not affect growth rate of life insurance industry in the current fiscal. 'It would affect the mutual funds industry more. I don't see it affecting insurance industry. One can expect close to last year growth (over 100 per cent). In fact, investment return of insurance companies will get affected positively (better returns),' he said.

Mr Bert Paterson, Managing Director, Aviva Life, said that he saw rising interest rates having only marginal impact on the growth rate of life insurance industry.

'I don't think so. If so, it would only be marginal,' he said, when asked whether hardening interest rates would hurt life insurance industry's growth rate this fiscal.

Bajaj Allianz's Chief Executive Officer (CEO), Mr Sam Ghosh, however felt that hardening interest rates would have some impact on the life insurance industry's growth this fiscal. 'The industry is likely to grow about 60 per cent this fiscal. We will grow at the industry rate,' he said.

Taken from Business Line

http://www.thehindubusinessline.com/ -  

report on hdfc by equity master:

OUTLOOK ARENA  >>   VIEWS ON NEWS >>  MAY 3, 2007

HDFC: Interest rate pinch

HDFC, India’s largest mortgage lending institution’s performance in FY07, manifests the fact that the contribution of mortgage finance to the country’s GDP has doubled from 3% to 6% in the last 2 fiscals. The institution has announced yet another fiscal of strong performance. For FY07, while income from operations have grown by 40% YoY, net profits are up 25% YoY. The financial institution has, however, faced margin pressures despite the sustenance in asset growth. HDFC’s net profit margins have infact contracted by 360 basis points (3.6%) due to higher cost of funds and higher effective tax rates.

(Rs m)	4QFY06	4QFY07	Change	FY06	FY07	Change
Income from operations	10,810	15,267	41.2%	37,863	53,140	40.3%
Other Income	1,588	2,062	29.8%	4,920	5,822	18.3%
Interest Expense	6,773	10,042	48.3%	24,911	36,668	47.2%
Net Interest Income	4,037	5,225	29.4%	12,952	16,472	27.2%
Net interest margin				3.5%	3.0%
Other Expense	439	475	8.2%	2,112	2,442	15.6%
Provisions and contingencies	46	52	13.0%	187	175	-6.4%
Profit before tax	5,140	6,760	31.5%	15,573	19,677	26.4%
Tax	874	1,260	44.2%	3,000	3,974	32.5%
Effective tax rate	17.0%	18.6%		19.3%	20.2%
Profit after tax/ (loss)	4,266	5,500	28.9%	12,573	15,703	24.9%
Net profit margin (%)	39.5%	36.0%		33.2%	29.6%
No. of shares (m)				249.6	253.0
Diluted earnings per share (Rs)*				50.4	62.1
P/E (x)					27.1

* (12 months trailing)

India’s largest HFC

HDFC, India’s largest housing finance company (HFC), with strong brand equity and market share of 21%, has an extensive reach with 237 branches (FY07) spread across the country and abroad. HDFC’s strength over the years has been its core business of housing loans. Meanwhile, it also has tried to benefit from the retail reach of its banking subsidiary (HDFC Bank) and has entered into an agreement to source ‘home loan accounts’ from the latter. However, 70% of the accounts are sold back to HDFC Bank in the form of Pass Through Certificates (PTCs). Over the years, HDFC has emerged as a financial conglomerate by not restricting its ambitions to just housing finance but also venturing into new businesses like insurance, banking and asset management (mutual funds). It has recently set up a ‘real estate fund’. The HFC has grown at a scorching pace over the years despite competition from banking entities in the mortgage financing space.

What has driven performance in 4QFY07?e

Margin blip: The statistics of mortgage finance contributing 6% of India’s GDP in FY07 from 3% in FY05 may appear enthusing. However, this does not demean the shortage of 45 m dwelling units as per the 11th 5-year plan (5 m backlog, 22 m in rural and 16 m in urban areas; Source HDFC). HDFC continues to cash in on the potential demand in the Indian hosing finance industry. The same has been further aided due to the effective cost of home loans being brought down from 11.3% in FY00 to 6.1% in FY07, due to the fiscal incentives.

The rise in interest rates in this fiscal, which has not been commensurate to the rise in income levels has, however, had a lagged impact on the institution’s incremental disbursals.

Approvals Vs Disbursements

(Rs m)	FY06	FY07	Growth
Current year
Approvals	256,340	333,320	30.0%
Disbursements	206,790	261,780	26.6%
D/A	80.7%	78.5%
Cumulative
Approvals	1,124,320	1,547,640	37.7%
Disbursements	931,030	1,192,810	28.1%
D/A	82.8%	77.1%

During FY07, HDFC’s disbursements grew by 27% YoY on the back of increase in loan approvals by 30% YoY. The disbursements to approval ratio at over 77%, although healthy, suggest a slowdown in incremental disbursals over the corresponding period of FY06. Also, despite the higher yield on assets, HDFC’s net interest margin has witnessed a blip of nearly 50 basis points in this fiscal. HDFC raised foreign currency bonds in FY07 and has indicated that it will incrementally resort to long term funding in the near future as against short term bank borrowings, the latter being available at steep costs.

Loan book break up…

	FY06	FY07	Change
Individuals	302,617	373,624	23.5%
% of total	67.3%	66.1%
Corporate Bodies	139,757	178,585	27.8%
% of total	31.1%	31.6%
Others	7,526	12,914	71.6%
% of total	1.7%	2.3%
Total loans	449,900	565,123	25.6%

The fact that HDFC saw a faster accretion of corporate customers to its loan book (against retail) must have also led to the institution falling short of bargaining power (in interest rates) against the former. The growth of 26% in loan book is in line with the sector average and the institution’s targets. This is also higher than our estimate of 20% YoY growth in loan book in FY07.

Other income - buoyed by surpluses: HDFC’s fee income remained flat in FY07 over that in FY06, suggesting continued pressure on processing income, in spite of higher pricing power. While the FI has been taking a cut in its fee income to compete in the increasingly competitive mortgage financing market, which is getting increasingly crowded by banking companies, its fee income (linked to incremental disbursements) has not grown at commensurate rates. This is also due to the fact that the institution has been increasingly relying on its subsidiary HDFC Bank (25% of the loans sourced in FY07) for sourcing the home loans from locations where it does not have a presence. Despite the fall in fee income, the HFC’s other income grew by 34% YoY during FY07, thanks to a 43% YoY growth in profit on sale of investments and higher surpluses from cash deployed in cash management schemes of mutual funds. The same may, however, not be sustainable going forward. The unrealized gains on investments at the end of March 2007 rose by 16% YoY.

Breakup of other income

(Rs m)	FY06	% of total	FY07	% of total	Change
Fee income	675	16.4%	686	12.5%	1.6%
Surplus from deploment in MFs	89	2.2%	387	7.0%	334.8%
Profit on sale of investments	2,272	55.2%	3,253	59.1%	43.2%
Dividend & other incomes	1,079	26.2%	1,179	21.4%	9.3%
Total other income	4,115		5,505		33.8%

Addressing resource constraints: As per the monetary policy for FY07, the provisioning requirement for commercial real estate loans has risen from 0.4% to 1.0% signaling the fact that the RBI is worried about the increase in real estate prices in India (risk weight on exposures to commercial real estate raised from 125% to 150%). In line with the RBI’s diktat, its counterpart NHB (regulatory body for mortgage loans) also hiked the provisioning requirements, which proved costly for HDFC. However, HDFC’s comfortable CAR of 12.9% at the end of March 2007 relieves it of capital raising requirement in the short term. Further, gross of 0.9% and net NPAs of 0.2% keep the asset quality provisioning requirements low for the institution.

What to expect?

At the current price of Rs 1,675, the stock is trading at 3.1 times our estimated FY09 adjusted book value. The investment value per share is Rs 145 (at book value). HDFC’s unique business model (sales through DSAs and arrangement with HDFC Bank) enables it to sustain the lowest cost to income ratio (11% in FY07) and enjoy operating leverage. The management has indicated that the timely lending rate hikes will ensure that its spreads are protected. However, this may have an impact on its asset growth.

In search for new avenues of growth, the institution is now targeting smaller cities, where real estate prices have risen, but not as much as the rise witnessed in metros and other large cities. On the international front, HDFC launched its operations in London in November 2006, in order to facilitate the Indians in England, through providing them with advisory services on housing finance and property acquisition in India. While the valuations, factoring in the market value of investments appear reasonable from a long term perspective, the same is subject to substantial downsides, in the event of inability to book the unrealized gains at opportune times.

 Blackstone eyeing HDFC's stake in Intelenet?

According That makes it the 12th largest BPO company in India.to sources, Blackstone is in leading race to acquire HDFC's stake in Intelenet BPO. HDFC is in talks to sell 50% stake in Intelenet BPO. HDFC and Barclays Bank hold 50% stake each in the BPO.

Intelenet's FY07 revenue is at Rs 383 crore and EBITDA is at Rs 54 crore.

It could be one of the biggest private equity deals in the BPO space. International private equity player Blackstone is in talks to buy HDFC’s 50% stake in BPO company Intelenet.

HDFC may be finally looking to exit the BPO space. Private equity player Blackstone is in talks to acquire HDFC's 50 % stake in BPO company - Intelenet. It is not yet clear what will be the price.

In FY07, Intelenet earned a revenue of Rs 383 crore and an operating profit of Rs 54 crore.

Founded in 1994, Intelenet offers outsourcing services in the financial, retail, telecom and hospitality industries. It has more than 5,000 employees working out of four centers in Mumbai and Chennai.

Intelenet also holds a 51% stake in publicly listed Sparsh India, another BPO with FY07 sales of over Rs 87 crore. That stake itself is worth Rs 170 crore at current market valuations. HDFC entered Intelenet three years ago, when it acquired a 50% stake from TCS, for Rs 161 crore. The remaining 50 percent is held by Barclays Bank. 

Now HDFC's 50% stake could be worth close to Rs 400 crore. That is because most BPOs are valued at one to one and a half times revenue. That's over Rs 600 crores in the case of Intelenet. Add to that, the Sparsh stake value and the BPO company's total valuation could near Rs 800 crores.

As of now, neither company has confirmed the deal.

2007-05-14 12:51:33 Source : Moneycontrol.com

Vipul ji

This is the value to be unlocked.

HDFC announces successful closing of its Real Estate Fund

2007-08-30 16:07:21 Source : Moneycontrol.com

http://202.87.40.52/images/mc_new/news_inside/email_icon.gif - http://202.87.40.52/images/mc_new/news_inside/print_icon.gif -   

Ms Renu Sud Karnad, Chairperson of http://www.moneycontrol.com/mccode/news/searchresult.php?search_str=HDFC%20Property%20Ventures%20Ltd&datesel=2 - . and  Executive Director, HDFC Ltd, said, “The objective of the Fund is to invest in FDI compliant real estate projects in India to achieve long-term capital appreciation. The Fund will target equity returns of 20%-25%. Through strong industry relationships and unparalleled expertise in the Indian real estate market, the Fund expects to have a competitive advantage over similar funds and generate enhanced returns for investors. The Fund will have a conservative approach with no regional or sector bias and would invest in residential, commercial, hospitality, education, healthcare sectors and developers’ entity level.”

As demonstrated by other more developed economies in Asia and South America, a key beneficiary and driver of India’s economic growth will be the real estate sector.  The Fund believes that the Indian real estate market currently presents a very compelling investment opportunity for investors. India’s long-term global competitiveness stems from factors such as being the world’s largest economy, rising productivity levels, superior-quality systems and processes, well developed financial markets, established legal and regulatory framework as well as significant labor-cost arbitrage.  The growth in investor interest is driven by strong economic growth, a reasonably stable currency and healthy foreign exchange reserves, quality and cost competitiveness resulting in outsourcing opportunities (both in services as well as in manufacturing), supportive government policy-making and buoyant capital markets.  In addition, the returns that numerous investments have generated in recent years have caught the attention of the investor community.

Mr. K. G. Krishnamurthy, Managing Director, HDFC Property Ventures Ltd   said, “We will be identifying and advising on opportunities available with reputed developers in the major cities having sound fundamentals. The Fund’s strategy is to take advantage of the current trends by investing in such companies and managing its investments in a manner that enables the developers of these Real Estate Projects to optimally harness the growing Indian economy and develop successful and profitable ventures for the Indian market.

With this international Real-estate Fund, HDFC will be the largest player in the real estate private equity space in India

What I understand they are simply managing asset and getting Asset managment fee. This time they are raised money for realstate MF. otherwise they are managing Equity and debt assets and earning management fee.

i thot so ...because equitymaster was showing the same valuation ..here is the link ..

http://bseindia.com/mktlive/grouploss.asp - http://bseindia.com/mktlive/grouploss.asp

i thot so ...because equitymaster was showing the same valuation ..here is the link ..

http://bseindia.com/mktlive/grouploss.asp - http://bseindia.com/mktlive/grouploss.asp

may b i m missing something.

Buy HDFC, target Rs 3288: Motilal Oswal

2007-11-16 11:12:50 Source : moneycontrol.com

Motilal Oswal Research has come out with report on http://www.moneycontrol.com/india/stockpricequote/finance-housing/housing-development-finance-corporation/11/16/HDF - HDFC . The firm has maintained buy rating on the stock  with target price of Rs 3288 implying potential upside of 21%, in research report dated on November 15, 2007.

"HDFC’s stronghold in the housing finance market has further strengthened with ICICI Bank and most state-owned banks going slow on http://www.moneycontrol.com/india/news/recommendations/buy-hdfc,-target-rs-3288:-motilal-oswal/313247 - - - - share for HFCs, mainly the leader HDFC. We believe HDFC deserves a premium valuation due to the continued traction in business and profitability, significant value unlocking from its various http://www.moneycontrol.com/india/news/recommendations/buy-hdfc,-target-rs-3288:-motilal-oswal/313247 - -

Disclaimer: The views and investment tips expressed by investment experts on  moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decision.

Buy HDFC; target of Rs 3362: Sharekhan

2007-11-20 13:48:36 Source : moneycontrol.com  

Sharekhan Research has recommended buy rating on http://www.moneycontrol.com/india/stockpricequote/finance-housing/housing-development-finance-corporation/13/50/HDF - with a price target of Rs 3362, November 19, 2007 report. "We have valued the core http://www.moneycontrol.com/india/news/recommendations/buy-hdfc;-target-of-rs-3362:-sharekhan/313754 - - mortgage business at 22x FY2010E EPS and if we adjust Rs 954 for the value assigned by us to its subsidiaries from the CMP of Rs 2700, HDFC is quoting at 15.9x its FY2010E earnings and 3x FY2010E book value. We feel the valuations look attractive considering HDFC's consistent above 20% earnings growth record, the potential value unlocking from its various subsidiaries and http://www.moneycontrol.com/india/news/recommendations/buy-hdfc;-target-of-rs-3362:-sharekhan/313754 - - investments , and the superior track record of its management. We initiate a Buy recommendation on the http://www.moneycontrol.com/india/news/recommendations/buy-hdfc;-target-of-rs-3362:-sharekhan/313754 - - stock with a price target of Rs 3362." according to Sharekhan Research report.

um, no. Sharekhan has been covering HDFC for years now. They've just updated their 'target price'.

Extending the 25% logic to the next level, am I right in assuming that over a long term, real estate companies like DLF/Unitech can only grow at 25% and not more than that?

HDFC Standard Life Insurance, the country’s private sector life insurer, is planning to dilute over 10 per cent equity through an initial public offer (IPO). 

The public issue will make HDFC Standard Life the country’s first life insurance company to be listed on the Indian bourses. 

Speaking on the sidelines of IIM-A Confluence, Deepak Satwalekar, managing director and CEO, HDFC Standard Life Insurance, confirmed that the company would be hitting the capital market very soon. Satwalekar said that the company was planning an IPO and its nitty gritty was yet to be sorted out. 

Commenting on the percentage of equity that would be diluted, Satwalekar said, “The company would be diluting over 10 per cent of its holding in the insurance company.”  HDFC Standard Life Insurance is a joint venture between HDFC and UK-based insurer Standard Life, which has an 18.1 per cent stake in the JV. 

Standard Life Insurance Company was recently listed on the London Stock Exchange. “We need to raise funds for our capital requirement for the life insurance business,” he said.  According to him, the life insurance business will need capital of around Rs 600 crore for the current year. He added that the IPO size would be above Rs 100 crore.  “If the regulation allows further dilution of equity stake, we will go for dilution of equity above 10 per cent”, he clarified.

 Currently, the insurance regulation allows an Indian insurance company to dilute only up to 26 per cent to any foreign partners.  Satwalekar said his company was hopeful that the regulation for equity dilution would be further increased to enable the insurance sector to raise more capital through equity dilution.

• Before we go to anything else, bread-and-butter issues. Since I also live on EMIs, will interest rates go down? If yes, when?

Well, I think the rates have to go down. We’re trying to be a part of the global economy. We’re trying to have tax rates that are prevalent in the Southeast Asian countries. You can’t have interest rates that are totally different from other countries.

http://economictimes.indiatimes.com/Market_News/Parekh_Mistry_purchase_HDFC_shares/articleshow/2782144.cms - Parekh, Mistry purchase over 1.85 lakh HDFC shares

When one runs the largest mortgage company for over 2 decades and knowing almost all the major corporates in India ( both home grown and foreign) and knowing kaun kitne paani me hai, it is safe to put money where its safest. They know exactly what HDFC does and what the risks are.

Kulmanji I assume you are saying this in the lighter sense ...I for sure know Mr Parekh's financial acumen is A + grade.

Suppose it happens will it be a off market transaction or will be through the exchange or will it be a bulk deal through exchange at predetermined price ....it doesnt matter but just keen to know when big stakes are sold..typically what would be the mechanism.