Stock Review: HDFC

India's largest mortgage firm HDFC beat Street expectations reporting a growth of 23% in net profit after tax.

However, excluding the impact of the one off factor income from sale of investments, the company's bottom line grew just by 14.5% YoY HDFC grew its loan book by 20% YoY in the quarter to March 2011, indicating that rising disposable income levels may be neutralising the impact of higher interest rates. With rates on the upswing, the share of corporate loans has come down while the proportion of retail loans has improved to 63% this quarter. The loan disbursements over approvals ratio has also been maintained at 80% for three quarters now.

It is not easy for NBFCs to grow their loan book at a high rate without compromising on the asset quality, but HDFC's record on asset quality has been outstanding. Its asset quality is one of the best in the industry, with the lender reporting for the 25th consecutive quarter an improvement in its asset quality. With borrowing costs on the rise, spreads on lending were expected to narrow. However, its asset-liability position has helped HDFC maintain its lending spread at 2.33%. Net interest income also rose 17% YoY. Non-interest income also rose due to treasury gains. While HDFC has shown that it can grow its loan book at a high rate without compromising on assets' quality, it could be tested in the quarter ahead in terms of repeating this robust show, given the challenges posed by rising interest rates and a slowdown in demand.