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

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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.

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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% 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% and its share prices (adjusted for stock splits and bonuses) have compounded at nearly 17%. If you take the arithmetic average of quarterly earnings growth percentages over the last 25 quarters, including the latest - the figure is 24.6%.

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% 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% from Rs 2,906.55 crore in Q2 of 2010-11 to Rs 4,077 crore this year, costs grew by 54% - 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%.

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.

Read the full article on Firstpost HERE