Unlocking Value

HDFC Ltd, the company that pioneered home loans in India four decades ago, enjoys a solid reputation of having 'been there, done that'. The institution is still a challenger to many of the banks that have made home loans their biggest play in the retail banking sector. But the fact is that HDFC has not only survived all these years, but also thrived in the financial services business without any promoter or government backing.

The housing giant has no time to pause. It is gearing up to tap the affordable housing space; a possible entry into the stressed real estate market, a new health insurance subsidiary and plans to scale up the education loan business are also on the cards. These future businesses could bring value to the company in the next five to 10 years. Besides, a variety of new areas like resale properties, extension loan, refinancing, loan against property, office loans and top-ups have emerged in the traditional housing segment. What will drive growth in the home loan market is the low penetration of mortgages as a percentage of GDP. This ratio is still under 10 per cent in India, while China, the US and UK are at 22 per cent, 63 per cent, and 68 per cent, respectively. The affordability factor, too, has improved drastically in the past three to four decades.

Given the encouraging market trends, the company is scaling new heights year after year. For the first time, HDFC has made into the top five in Business Today's ranking of companies based on average market capitalisation in the review period of October 2016 to September 2017. Its average market capitalisation has increased by over 21 per cent from `1.94 lakh crore during October 2015-September 2016 to `2.36 lakh crore during October 2016-September 2017. Its market cap rose to `2.81 lakh crore on October 3, 2017, but came down a bit since to `2.69 lakh crore on November 20, 2017.

HDFC Ltd, having a loan book size of close to `3 lakh crore, has come a long way over the past 40 years. Be it the new generation private bank HDFC Bank, or the mutual funds or insurance subsidiaries, the Deepak Parekh-led company has managed to create a lot of value in each one. Take for example HDFC Bank which, with average market capitalisation of `3.77 lakh crore (in the October 2016-September 2017 period), is bigger than the parent company. HDFC Life is the newest life insurance subsidiary that has recently unlocked value - its market capitalisation is close to `70,000 crore. "At some point in the immediate future, the AMC will get listed," says Keki Mistry, Vice-chairman and CEO of HDFC Ltd. "We will create more value over the next three to five years as new businesses such as education or the general insurance business become more mature."

Investors vouch for HDFC's consistent growth. Its return on equity (RoE), a measure of profitability, is 21 per cent; the same for ICICI Bank is around 10-11 per cent. HDFC's costs, too, are under check. It has a cost-to-income ratio of 7.4 per cent. This ratio has come down drastically in the last few decades - it used to be upwards of 30 in the 90s and around 13 per cent in the following decade. Indian banks have a cost-to-income ratio of over 40 per cent. Given the pace of technology adoption and outsourcing of loans from banks, this ratio may go down further. HDFC's asset quality is also noteworthy. Its non-performing assets are the lowest at 0.79 per cent. In fact, a large retail loan book also offers a cushion from defaults or cyclical nature of the corporate loans.

Analysts tracking HDFC believe there will be much more to come from the housing major in the coming decades, apart from growth in its existing businesses. The affordable housing segment - slated to grow from `1.5 lakh crore to `6 lakh crore in the next four years according to an India Rating report - will be key. The interest rate subsidies from the government are expected to fuel growth in affordable housing. Gujarat-based Gruh Finance, which it acquired in 2000, is rightly positioned to exploit the opportunity in small ticket home loans.

With `13,244 crore loan book and 185 offices in close to a dozen states, Gruh Finance has a very high return on equity at 31 per cent. Its market capitalisation has jumped from `8,701 crore to `18,390 crore in the last 18 months. Gruh Finance addresses the `7-8 lakh market segment. "We are looking at affordable loans which are higher than `7-8 lakh amount, around `10-12 lakh," says Mistry.

HDFC is also exploring opportunities in the stressed real estate space. It's a natural fit as HDFC has displayed core competence in the housing and real estate space. The institution could acquire assets at low value and bring in a developer and people from the group to turn it around. However, it is still "very much in the drawing board stage" Mistry informs. Another new area is health insurance. Although HDFC already has two subsidiaries in the life and the general insurance space, the new foray into health insurance would be done through the subsidiary route under the existing general insurance business.

The housing finance giant's progression will not be without challenges. With the advantage of low cost funds, banks are making big strides in the home loan market. Newer competitors like SBI, ICICI Bank and Axis Bank are emerging. SBI is already the largest player, with a market share of 16 per cent, followed by HDFC. But the biggest advantage HDFC has is low operating costs. In fact, its cost-to-income ratio is low even by global standards.

The company has had a prolific run under the aegis of Parekh, with Mistry at the helm. But who after Mistry? That's a pertinent question.

@anandadhikari