HDFC’s loan growth is likely to moderate with withdrawal of dual-rate product and hike in lending rates. Rising coking coal prices will continue to dent SAIL’s margins

HDFC's December quarter results were good, but going forward it will face a higher base, moderating demand, and higher cost of funds. SAIL, however, disappointed as higher fuel and raw material expenses and lower realizations hurt its performance in the period.

Housing Development Finance Corporation (HDFC)

The net profit of housing finance company HDFC grew by 33% to about Rs891 crore in the December quarter, from Rs671 crore in the corresponding period a year ago. This was at the higher end of expectations. There is a capital gains element of Rs170 crore in these numbers (from the IL&FS stake sale), but this was expected.

Net interest income (NII) was up by 20% to Rs1,074 crore in the period under review, from Rs895 crore in the previous corresponding period. This came in much higher than expectations. At the upper end, this was expected to be Rs1,110 crore. Disbursements grew by 21% and loans by 20%, both in line with expectations.

The general opinion is that the mortgage lender is dealing with a higher base and moderating demand and that this will slow down incremental growth, at least slightly. Even while approval growth of 29% indicates a strong pipeline, it is likely that loan growth will moderate with the withdrawal of the dual-rate product and a hike in lending rates.

HDFC's cost of funds will probably rise further in the fourth quarter as it sees the full impact of a sharp rise in the cost of wholesale funds

Since the bribes-for-loans scam was revealed a couple of months ago, developers have been finding it challenging to raise loans from public sector banks. This has increased the pricing power of HDFC (and other companies that are funding developers), albeit at a higher risk.

Going forward, HDFC expects a loan book growth of 15-20% for the year.

The biggest problem for HDFC, according to market watchers, is valuations. At upwards of five times FY12 price-to-book, it is the most expensive non-banking financial institution. This makes it all the more vulnerable to a slowdown in mortgages and a spike in interest rates. Die-hard HDFC investors say its high quality will ensure that its valuation premium remains intact and that this will protect the downside even in a tough environment.





The HDFC stock is down about 7% in the past one month, most of the loss has happened in the past one week.



Steel Authority of India (SAIL)

SAIL's third quarter results were badly hit by higher coking coal costs and wage provisioning, which resulted in a sharp decline in earnings. There was a sharp drop in EBITDA per tonne from $178 to $112 in the period under review.

Imported coking coal contract prices nearly doubled to $209 per tonne, whereas SAIL used its higher-priced coking coal inventory (at $225 per tonne) during the quarter.

Realisations were up by 2.5% y-o-y, and yet disappointing, and saleable steel volumes were up by 12%. More disappointing was that even q-o-q realisations were down despite a price hike in December.

Coking coal prices are expected to rise to as much as $250-$260 a tonne in the next quarter and will probably continue to dent SAIL's margins.

However, rising steel prices would help to some extent. Domestic steel prices have risen by Rs1,000-1,500 a tonne over the past month and a further hike is expected soon.



But market players believe that the SAIL stock is at a risk as it is trading at above its historical average price-to-earnings multiple of 10 times. It has lost almost 10% in the past one week. The share is down 33% over the past one year.




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