HDFC Ltd: Top Player in Housing Finance

Housing Development Finance Corp – HDFC Ltd

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(A) About Housing Development Finance Corporation Limited (HDFC Ltd)

Housing Development Finance Corporation Limited (HDFC Ltd) is an Indian financial services company based in Mumbai. It is a major housing finance provider in India. It also has a presence in banking, life and general insurance, asset management, venture capital, realty, education, deposits and education loans.

HDFC Ltd was found in 1977. It was promoted as a ‘development finance institution’ by the Industrial Credit and Investment Corporation of India Limited (ICICI), the International Finance Corporation, Washington and His Royal Highness The Aga Khan.

Further, HDFC undertook several consultancy assignments in housing finance in various countries across Asia, Africa and East Europe.

Mr. H. T. Parekh was appointed as the Chairman of the Company.

Presently, HDFC has extensive distribution network of 603 interconnected offices (including 202 offices of HDFC Sales). HDFC covers additional locations through its outreach programs all over India.

Further, it has 3 representative offices in Dubai, London and Singapore offering Home Loan products to Non-Resident Indians and Persons of Indian Origin.

(B) Journey Since Inception

(C) Executive Board Members

(i) Mr. Deepak S. Parekh – Chairman

Mr. Deepak S. Parekh is the Non-Executive Non-Independent Chairman of the Corporation and its key subsidiaries.

Mr. Parekh is a Fellow of The Institute of Chartered Accountants in England and Wales. Further, He is an expert in finance, accountancy, audit, treasury, mergers & acquisitions, corporate governance, and risk management.

Mr. Parekh joined the Corporation in 1978. He was inducted as a whole-time director of the Corporation in 1985 and subsequently appointed as the Managing Director of the Corporation (designated as ‘Chairman’) in 1993.

Housing Development Finance
Corporation Limited (HDFC Ltd) - directorships Mr Deepak S Pareskh

His remuneration for FY 21 is INR 3.12 Crore i.e. 0.01% of Net Profit.

(ii) Ms. Renu Sud Karnad – MD

Ms. Renu Sud Karnad is the Present Managing Director of HDFC. She is Managing the lending operations of the Corporation, both individual and non-individual. She also oversees the functions of human resources, communication and brand strategy. 

Ms. Karnad holds a Master’s degree in Economics from the University of Delhi and a Bachelor’s degree in law from the University of Mumbai. Ms. Renu is a Parvin Fellow – Woodrow Wilson School of Public and International Affairs, Princeton University, USA. Additionally, she is an expert in finance, economics, sales & marketing, human resources and risk management.

Ms Renu joined the Corporation in 1978 and was appointed as the Executive Director of the Corporation in 2000, re-designated as the Joint Managing Director of the Corporation in October. Ms Karnad has been the Managing Director
of the Corporation with effect from January 1, 2010

She received INR 15.01 Crore as remuneration for FY 21 i.e. 0.01% of Net Sales and 0.07% of Net Profit.

Housing Development Finance
Corporation Limited (HDFC Ltd) - Directorships Ms Renu Sud Karnad

(iii) Mr. Keki M. Mistry – Vice Chairman and CEO

Mr. Keki M. Mistry is the Vice Chairman & CEO of the corporation. Currently, he handles the overall functioning of the Corporation.

Mr. Mistry is a fellow member of the ICAI. Mr. Mistry is an expert in finance, accountancy, audit, economics, consumer behavior, sales & marketing, corporate governance, risk management and strategic thinking.

Mr. Mistry joined the Corporation in 1981. He was appointed as the Executive Director of the Corporation in 1993 and as the Managing Director in 2000. He was re-designated as the Vice Chairman & Managing Director of the Corporation in October 2007. Mr. Mistry has been the Vice Chairman & Chief Executive Officer of the Corporation with effect from January 1, 2010.

Further, he is currently the Chairman of CII National Council on Corporate Governance and a member of Primary Markets Advisory Committee set up by the Securities and Exchange Board of India (SEBI). He was also a member of the Committee on Corporate Governance set up by SEBI.

His remuneration for FY 21 was Rs 17.02 Crore i.e. 0.01% of Net Sales and 0.08% of Net Profit.

Housing Development Finance
Corporation Limited (HDFC Ltd) - Directorships

(iv) Mr. V. Srinivasa Rangan – ED and CFO

Mr. V. Srinivasa Rangan is the Executive Director and CFO of the Corporation. He is responsible for mobilization of funds for the Corporation, investments, asset-liability management and financial accounts. He is the director in charge of business responsibility.

Mr. Rangan holds a Bachelor’s degree in Commerce from University of Delhi and is an Associate of The Institute of Chartered Accountants of India. He is an expert in finance, accountancy, audit, economics, corporate governance, legal & regulatory compliance, risk management and strategic thinking.

He received Rs 11.19 Crores as remuneration for FY 21 i.e. 0.008% of Net Sales and 0.05% of Net Profit.

Housing Development Finance
Corporation Limited (HDFC Ltd) - directorships V.Srinivasa Rangan

(D) Shareholding Pattern of HDFC Ltd.

Housing Development Finance
Corporation Limited (HDFC Ltd) - Shareholding pattern

In HDFC Ltd, the Promotor Holding is NIL. However, Company’s major shares are held by FPIs being 71.95%.

Housing Development Finance
Corporation Limited (HDFC Ltd) - Holding more than 1%

(E) Lending Portfolio of HDFC Ltd

HDFC’s Loan Portfolio comprises of Home Loans, Home Improvement Loans, Home Extension Loans, Home Equity Loans, Rural Home Loans, Loans to NRIs for Individuals.

Moreover, the Non-individuals basket covers the Corporate Loan, Construction Finance Loan, Lease rental discounting loan etc.

The Assets Under Management (AUM) of the Company as at March 31, 2021 amounted to Rs 5,69,894 Crore.

(i) Product Wise – Lending Breakup HDFC Ltd

Housing Development Finance
Corporation Limited (HDFC Ltd) - Lending Breakup , product wise

(ii) Category-wise Lending Mix – HDFC Ltd

Housing Development Finance
Corporation Limited (HDFC Ltd) - Individual loan breakup

(iii) Market Share of top 3 Housing Finance Companies

Market share of HDFC Ltd improved from 40% in FY18 to 45% in FY20.

Market share of top 3 housing finance companies

(F) HDFC Ltd – Loan Book

(i) Loan Book ClassificationHDFC Ltd

Housing Development Finance
Corporation Limited (HDFC Ltd) - Loan Book Classification

HDFC Ltd – Growth of Asset Under Management over past 5 years

Housing Development Finance
Corporation Limited (HDFC Ltd) - AUM Growth
  • HDFC Ltd Asset Under Management (AUM) grew at a CAGR of 14% over past 5 Fiscal Years, showing a consistent and considerable growth.
  • In FY 21, Company’s AUM grew by 10.27% to INR 5,69,894 Crore as compared to INR 5,16,773 Crore in the Previous Fiscal Year.
  • On the other hand, housing Loan Segment or the Individual Segment of the Company increasing continuously. In March 2016 the proportion of Individual Segment was around 73%. Whereas In March 2021 it increased by 4% to 77%.

The company is maintains its loan book more securely keeping the accurate proportionate in other segments like corporate, construction, and LRDs.

(G) Interest Parameters – HDFC Ltd

(i) Interest IncomeHDFC Ltd

HDFC Limited’s Interest Income includes Interest on Loans, Interest Income From Investments, Interest on Deposits with Banks and other Interest Income.

Housing Development Finance
Corporation Limited (HDFC Ltd) - Interest Income

(ii) Interest ExpenditureHDFC Ltd

Housing Development Finance
Corporation Limited (HDFC Ltd) - Interest Expend

(iii) Net Interest IncomeHDFC Ltd

HDFC Ltd Net Interest Income has grown drastically over the years. Net Interest Income of the Company grew at a CAGR of 13% of last 10 Financial years.

Housing Development Finance
Corporation Limited (HDFC Ltd) - Net Interest Income

(iv) Interest SpreadHDFC Ltd

Company Interest Spread are lying in a similar range from past 10 years. In the year 2021 Interest Spread of the Company stands at 2.29% as compared to 2.27% in the previous Fiscal year.

Housing Development Finance
Corporation Limited (HDFC Ltd) - Interest Spread

(v) NIM (%)HDFC Ltd

Company’s Net interest Margin in Year 2021 grew to 3.50% from 3.40% in 2020.

Housing Development Finance
Corporation Limited (HDFC Ltd) - NIM%

(H) Borrowing Mix – HDFC Ltd

HDFC Ltd. Funding profile is well diversified across External Commercial Borrowings, Debenture and securities, Deposits.

Company’s Sources of Funds include a larger proportion of Borrowings from Debenture and securities. Company’s Borrowing From Debenture and securities decreased from 57% in 2018 to 42% in FY 21. Additionally, the company has a sizeable proportion of funding from Deposits and Term loans which Consists a Proportion of 34% and 21% respectively.

Housing Development Finance
Corporation Limited (HDFC Ltd) - Borrowing Mix

(iii) Cost Of Borrowing – Improvement

Housing Development Finance
Corporation Limited (HDFC Ltd) - Cost of Borrowing%

(I) Geographical Network

The Corporation’s physical distribution network now spans 593 outlets, which includes 203 offices of HDFC’s wholly owned distribution company HDFC Sales Private Limited (HSPL) in all over India.

HDFC Sales Private Limited (HSPL) has a presence in 203 locations. During FY21, HSPL sourced loans accounting for 54% of individual loans disbursed by HDFC.

Moreover, HDFC has overseas offices in London, Singapore and Dubai. The Dubai office caters to customers across Middle-East through its service associates.

Housing Development Finance
Corporation Limited (HDFC Ltd) - Distribution Network

(J) Operational Parameters of HDFC Ltd

Check and compare the operational parameters of other top Housing Finance Companies also:

(i) Average Yield On Assets

Company’s Average Yield on Assets decreased from 9.68% in F.Y. 2013 to 6.70% in 2021.

Housing Development Finance
Corporation Limited (HDFC Ltd) - Average Yield on Asset

(ii) Cost To Income Ratio

Company’s Cost To income Ratio reduced in FY21 to 7.70% from 9%.

Housing Development Finance
Corporation Limited (HDFC Ltd) - Cost to Income Ratio

(iii) Capital Adequacy Ratio (CAR)

Company’s CAR increased by 7.60% during the Past 10 years. Moreover, In FY21 company has Recorded appreciation of 4.6% from Previous Fiscal Year.

Housing Development Finance
Corporation Limited (HDFC Ltd) - CAR

(iv) Gross NPA (%)

Housing Development Finance
Corporation Limited (HDFC Ltd) - Gross NPA

(v) Net NPA (%)

Housing Development Finance
Corporation Limited (HDFC Ltd) - Net NPA

Company’s Asset Quality is stable over the years. Company’s Gross NPA has shown a minor improvement by 0.01% in FY21 from 1.99% to 1.98%. On the other hand, Net NPA has also shown reduction to 1.15% in 2021 against 1.49% in the previous Fiscal Year.

The increase in NPAs is on account of non-retail segment under loans given.

(vi) Sources of Loans

The company sources its Loan from its own Subsidiary and third party DSAs.

(J) Subsidiaries of HDFC Ltd.

Housing Development Finance
Corporation Limited (HDFC Ltd) - Subsidiaries

(K) Financial Parameters

Housing Development Finance
Corporation Limited (HDFC Ltd) - Financial Parameters

HDFC Ltd Operating income has shown good growth over the years. Its operating income grew at a CAGR of 18% over the last 10 Financial Years.

The Company delivered slower Profit growth over the last 10 years and grew at a CAGR of 13%.

The company’s PBIDT Margin has grown well over the years. On the other hand, PAT Margin has shown a Stable growth over the last 10 years.

Company has been maintaining a healthy track record of Return On Assets (ROA) and Return On Equity (ROE) over past 10 years.

The Dividend payout Ratio of the Company in past 10 FYs looks healthy.

(L) Management Discussion & Concall Highlights

The Corporation continued its commitment towards supporting the government’s flagship scheme, ‘Housing for All’ and pursued efforts towards lending to the Economically Weaker Section (EWS), Low Income Group (LIG) and Middle Income Group (MIG) segments.

Further, the Corporation has the largest number of home loan customers – of approximately 2.3 lac who have availed benefits under the Credit Linked Subsidy Scheme (CLSS).

The average size of individual loans stood at Rs 29.5 Lakhs during FY21, compared to Rs 27.0 Lakhs in FY20. The increase in the average loan size is largely attributable to the fact that demand for home loans was from both, affordable housing and higher end properties.

As far as non-individual loans were concerned, the Corporation opted to be cautious in lending.

Financial Highlights – Q2 FY22

The total loans sold during the six months ended September 21, amounted to Rs. 12,621 crore. The overall loan book till 30 Sept, 2021 is Rs. 5,20,798 crores.

  • Individual loan disbursements in Q2 FY22 were 48% higher than during the Q1 FY22 and 44% higher compared to the corresponding period in the previous year.
  • As of September 30 2021, Non-performing individual loans stood at 1.10% while nonperforming non-individual loans stood at 4.69%. However, the NPA of Total Loan Book was recorded at 2%.
  • NIM (Net Intertest Margin) as on 30 Sep 21, was 3.6%, compared to 3.2% during the corresponding period of the previous year
  • The NII, for the quarter ended September 30, 2021 was Rs 4,109 crores compared to Rs 3,647 crores in the corresponding quarter of the previous year – growth of 13%
  • In Qtr2, New loan applications were received through the digital channels is 89%.
  • Management guided that it should be able to further reduce credit costs over the next 2–3 years, which should further improve RoE. It does not plan to reverse provisions over the near term.
  • It is seeing a lot of popularity in construction finance in Tier 2 cities of Gujarat, Ahmedabad, Surat, and Vadodara. The Delhi and Mumbai markets are also booming.

(M) Opportunities & Strengths

a) Opportunities

(i) Lower mortgage penetration

In India, there is Lower penetration in the segment of Mortgage Loans. It is only about 10% of the overall loan industry. Nowadays, Banks are competing with other banks to offer the most cost-effective home Loans which results in interest rates at 10 years low. But banks are mostly catering to Tier 1 customers, whereas penetration for Tier II and Tier III cities is yet to be covered. This will be a great opportunity for affordable HFCs like HDFC Ltd.

(ii) Growing urbanization

The rapid growth trend in the Segment of urbanization requiring more residential units. In addition to that rise in the number of households with a shift towards nuclear families. Moreover, it is an expectation that by 2030, 50% of the country’s population, shall reside in cities. Further, 65-70% population of India are under 35 which has greater potential to make a Better home for them and for their family.

(iii) Digital Movements

Company had focus on online loan processing during the lockdown, coupled with its quick response making its services stay seamless and uninterrupted. Moreover, Digitalization has helped reduce paper consumption and brought about efficiencies in processes and systems.

During FY22, approximately 81% of borrowers were digitally on-board.

(a) Strengths

(i) Market leadership in the housing finance industry

HDFC is the market leader in the housing finance industry in India. The company has a strong distribution network comprising 585 outlets. In addition, HDFC covers several locations in the country through outreach programs. HDFC has an international presence, which primarily caters to the non-resident Indians.

(ii) Experienced management

Established in 1977, the company has a strong track record in the housing finance sector with a stable and experienced
management. For instance, Mr Deepak Parekh is the Chairman of HDFC Ltd, Mr Keki Mistry (Vice Chairman & CEO) handles day-to-day affairs, Ms Renu Sud Karnad (Managing Director) and Mr V Srinivasa Rangan (Executive Director) have assistance of a team with vast experience.

(iii) Advantage of Leading Subsidiaries

HDFC’s subsidiaries/associates are important players in the Banking industry, Asset Management business, Life & General Insurance sector. For instance, HDFC Asset Management is one of the largest mutual fund managers. Moreover, HDFC Life Insurance and HDFC Ergo General Insurance are amongst the leading insurers in life and general insurance segment, respectively

(iv) Strong resources profile

HDFC has a strong and well-diversified resource profile. As on March 31, 2021, market borrowings by way of debentures and securities constituted 42% of the total borrowings, deposits constituted 34% and term loan
24%. The company is able to raise borrowing at competitive rates, thus is able to compete in the current competitive market with all-time low interest rates in the Home Loan sector.
Furthermore, the company has strong deposit base with high renewal rates and 61% deposits being onboarded digitally.

Moreover, as on June 30, 2021, deposits have further increased to 35% of overall borrowings while market borrowings constituted 41% and term loans constituted 24% of overall borrowings.

(N)  Risk/Concerns

(i) Risky sector other than Individual
As on March 31, 2020, non-individual segment accounts 24% of AUM, which exposes company to some concentration risk. As on March 31, 2020, Top 10 group exposures account 15% of loan book and 77% of net worth.

However, company has strong systems and processes to manage non-individual exposures. Further, top group exposures of company consist of groups with strong credit profile and these group exposures are spread across multiple projects, which bring in diversification of risk.

(ii) Competitive Environment – Home Loan segment

HDFC faces competition in prime home loan segment as banks are aggressively targeting prime home loan segment. HDFC faces competition from banks and leading Housing Finance Companies, primarily while lending to the salaried borrower segment.

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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry’s Publications.

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

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