Costs up, but not to worry. For HDFC is Mr Reliable

Housing Development Finance Corporation (HDFC) never surprises. Even if it does, the surprise is limited to a narrow band of possibilities. And this narrow band is roughly defined as 20-24 percent growth in net profits every quarter (See Table).

Over the last five years, the company’s net profits have grown at the compounded annual rate of 18.5 percent and its share prices (adjusted for stock splits and bonuses) have compounded at nearly 17 percent. If you take the arithmetic average of quarterly earnings growth percentages over the last 25 quarters, including the latest - the figure is 24.6 percent.

If you are an investor with a heart condition who cannot take earnings shocks, HDFC is for you.

The second quarter (Q2) of 2011-12 is a case in point. The (mild) surprise is that this time the company has hit the bottom end of its profit growth band. Net profits showed up at 20.3 percent in the quarter to 30 September 2011 year-on-year. This means it must have been tough.

If you look at the numbers closely, there’s a story in it. The topline is growing slower than costs. While income from operations went up 40 percent from Rs 2,906.55 crore in Q2 of 2010-11 to Rs 4,077 crore this year, costs grew by 54 percent - from Rs 1,836.68 crore to Rs 2,831.44 crore.

The reason: interest costs, which are rising even faster than overall costs. In the September quarter, year-on-year growth in interest costs was nearly 57 percent.

HDFC has posted a net profit of Rs 971 crore, up from Rs 807.54 crore a year ago. The figure was above analyst expectations because analysts had assumed the worst, given rising interest costs.

But the analysts were both right and wrong. They expected a profit figure of Rs 945 crore when HDFC manufactured Rs 971 crore - thanks to an additional profit of Rs 28 crore on the sale of investments this year (Rs 87 crore versus Rs 59 crore in 2010-11).

At a press conference, HDFC Vice-Chairman and CEO Keki Mistry said growth in the loan book for the year ending March 2012 would be about 20 percent. For the quarter ending September, the growth was about 25 percent. The loan book as on 30 September was Rs 1,26,992 crore.

Despite the economic slowdown and high interest rates, the mortgage institution said it was not facing any asset quality issues.

In terms of profitability metrics, Mistry said HDFC’s net interest margin - the difference between interest paid and received after taking into account other operational expenses - was 4.3 percent for the quarter.

Gross spreads - the difference between interest paid and interest received during the quarter - was 2.28 percent.

An initial public offer for insurance subsidiary HDFC Life is slated for 2013, Mistry added.

Markets were unmoved by the results: the stock was up less than one percent at Rs 672.60.

Not surprising. Costs may rise, costs may fall. But HDFC delivers 20-24 percent every quarter.

For the results press release, click here .

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