Company Background

The Housing Development Finance Corporation Limited (HDFC) as incorporated in August 1994. Its history relates back to the year 1977 when the Corporation was established with its primary focus maintain consistent operations in the field of mortgages which led the company to become the market leader. The expertise of the company lies in the retail mortgage loans to various segments of the market plus a significantly growing client base in housing credit facilities. It holds a well defined image in the International market as well. The company has made its mark on various dimensions ranging from experience in financial markets to large shareholder base followed by strong reputation in the market. Hence, it was properly architecture to perform well and make it footprints in the Indian Banking Industry.

The HDFC received ‘in principle’ approval from Reserve Bank of India to establish its business as a private sector bank. It was in the view of liberalization policy which RBI was planning for the Indian Banking Industry in 1994. Thus, the approval rested with incorporation of The Housing Development Finance Corporation Limited in August, 1994 with its registered office in Mumbai, India.

The main objective of the company was to build sound relations with customers and franchises engaged in different working areas so that the company’s banking services could cater to a major portion of business finance. The target retailer and wholesaler consumer segments were attracted with the strategized policies of the business to earn consistent profits in lieu of the risk appetite of the bank. The bank works on ethical standards maintaining them to the highest level, professional integrity, regulatory measures and good governance. The five core values of HDFC are-

1. Operational Excellence
2. Customer Focus
3. Product Leadership
4. People and
5. Sustainability.(HDFC, 2015)

At present, the bank has distributed its business to much higher levels. It has almost 4014 branches in 2464 cities of the country providing online services on real time basis. Other services may include Mobile Banking, Net banking, Phone Banking and Message based Banking. The bank’s current focus is also to cover maximum customer base for loans as well as deposits especially the corporate base where it has its leading clients. Further, the bank works as a clearing house to various stock exchanges which help it to spread its network to the areas where NSE/BSE has their good member base. The Bank distributes cash through 11766 ATMs all over the country which can be accessed through various kinds of domestic as well as international plastic cards like Visa /Master Card/ American Express Credit cardholders etc.

The company’s technology environment is highly updated both in terms of IT and communication systems. All its branches are inter connected through internet which enhances the inter branch functions. The bank also provides multi branch functions to its customers. In the field of IT also, the company aims to acquire the reputations of world class level and therefore hired the best available technology which is used internationally. The major technologies used by the company are Flex cube for Core-banking facilities, Fin ware for Retail Banking facilities etc. Both these soft wares are provided by i-flex Solution Ltd. (HDFC, 2015). The usage of finest technology has been recognized by the company as one of its major goals and it aspires to make progress in the field of web enabled core businesses.

Services Provided by HDFC Bank

Coming towards the services provided by the company which is diversified into wholesale and retail banking facilities, it provides commercial and investment banking services in the former one and transactional services in the latter. Thus, the major segments of the business are the Wholesale business, Treasury and Retail Business. (HDFC, 2015)

 The Wholesale business segment majorly covers the blue chip companies and to some text small and medium sized and agro based companies. A large number of services are provided to these customers like trade and transactional services, cash management working capital finance etc. The strong reputation and customer base has made the bank a member to a number of consortium finance services provide to large Indian and multi-national businesses. The Cash management services are also provided to various mutual funds, stock exchanges, banks etc.

Talking about the Treasury Business, the major products include Derivatives and Foreign Exchanges, Money Market and Debt securities and Equities. The bank’s treasury wing provides advisory services to various corporate owing to the liberalization policy in the country. The treasury business further manages the risk and portfolio for the minimum (25%) statutory requirement of deposits in government securities.

The Retail Banking segment is fully dedicated to provide numerous banking services to all the target customers all through a one-stop window. The services are provides through Net Banking, Phone Banking, Mobile Banking, ATMs etc. The bank focuses on the clients having good financial worth and who wants to invest their money wisely. It also helps in raising finance for various purposes. The loan products thus include Auto Loans, Secured Loans, Vehicle Loans, and Personal Loans etc. The bank is also leading in the business of various internet banking services for Fixed Deposits, Payment of bills, loan repayment and interest payments etc.

The company has an authorized capital of Rs. 550 crore. The equity share capital has been divided among the HDFC Group, ADR/GDR Depositories, Foreign Institutional Investors and the outside shareholders. The percentages of investments has been given below-

HDFC Group                                      –                       22.60%

ADR/GDR Depositories                     –                       17.00%

FII                                                       –                       34.10%

The paid up capital of the bank is around Rs. 506 crores consisting of around 252 crore Equity Shares of Rs. 2 per share. Further, the listing of the shares is under the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) for the Indian shares, for the American Depository Receipts the company has got its listing in the New York Stock Exchange (symbol ‘HDR’) and finally for the Global Depository Receipts the listing is on Luxembourg Stock Exchange. (HDFC, 2015)

The bank’s deposits shows a increasing amount from past five years and ends to around Rs. 5,50,000 crores with borrowing for around Rs. 53,000 crores. Thus, total debts come to around Rs. 6, 00,000 crores. However, reserves show an amount of Rs. 72, 000 crores giving a positive image when compared to its borrowings. The short-term liabilities of the bank show a positive trend overall in the past five years however there is an approximate increase of 13% from the previous financial year.

Capital Structure of HDFC Bank

The financial ratios i.e. the Current and the Quick Ratio indicate that the company is performing well comparatively past four years and is picking up its mark in liquidity. The present current ratio computes 0.07 compared to 0.04 in last year. Further, this ratio is highest among past five years. Similarly, Quick Ratio computes 14.51 compared to 12.69 in last year. Thus, the liquidity of the company cannot be questioned right now. Finance charges coverage ratio is almost intact in past five years. It computes 1.40 in 2016, 1.42 in 2015 and 1.40 in 2014. This reflects company’s consistent ability to repay its interest charges on timely basis. (Equitymaster.com, 2016)

(Given structure is according to the latest audited Balance Sheet for the financial year ended on 31^st March, 2016)

The calculation of Weighted Average Cost of Capital of HDFC for Three years is as follows:-

Calculation of WACC                                                            ( Amount in Rs. Crore)
Particulars	2016	2015	2014
Net Worth	743041	631541	441666
Borrowings	717635	594783	495967
Total	1460676	1226324	937633
Ke (%)	14	14	16
We	0.51	0.51	0.47
Kd (%)	31.33	30.28	31.2
Wd	0.49	0.49	0.53
WACC	22.51	21.90	24.04

For the above calculations, the following formula has been used:-

Ke       =                      D1                   +          G

P0

            Where, D1= Expected Dividend for the year

                        P0= Current Market Price

                        G= Anticipated Growth

Growth            =          r x b

            Where, r = Return on Equity

                        b = Retention Ratio

Kd                   =                      Interest Expenses after tax                 X         100

                                           Total Borrowings

WACC            =          (Ke X We) + (Kd X Wd)

The calculations for Cost of Equity (Ke) and Cost of Debt (Kd) is as follows:-

Calculation of Ke
Particulars	2016	2015	2014
Dividend per share	9.43	7.88	6.46
Growth	14%	14%	16%
Expected Dividend per share	10.75	8.98	7.49
Current Market Price per share	1575.8	1575.8	1575.8
Ke	14	14	16

Calculation of Kd
Particulars	2016	2015	2014
Interest expense	340696	272885	234455
Borrowings	717635	594783	495967
Kd (before Tax)	47.47483	45.87976	47.2723
Tax Rate	34%	34%	34%
Kd (after Tax)	31.33	30.28	31.2

Calculation of Growth for three years
Particulars	2016	2015	2014
Dividend Payout (%)	18.8	18.8	18.8
Retention (%)	81.2	81.2	81.2
Return on Equity (%)	17.2	16.9	19.8
Growth (%)	14	14	16

 (The information from all above calculations has been taken from (Equitymaster.com, 2016) and (HDFC, 2016))

Conclusion-

The above analysis shows that the cost of capital has once increases from 2014 to 2015 and then decrease in 2016. Thus, the investors’ expectations are not constant when talking about the past three years only. Further, growth prospects in the year 2014 were 16% which reduced to 14% in the recent years. This is an indicator that despite of similar payout ratio in the three years the growth prospects has declines. This may be due to reduced Return on Equity in the recent years from 2014. On the whole, the bank’s picture is quite clear as regards the financial situation but comparatively its worth has declined in recent years.

The recommendations for the old investors to hold their investment or sell and for new investors regarding whether to invest in the company or not can be derived from the following information as given below:-

The results of the company are very solid but these results cannot change the long-term perspectives of the investors. The Bank’s Fair Value is unchanged over a long period of time representing fiscal 2017 price/BVPS of 3.6 times. This is the highest ratio among the banking sector companies including the leading ones. However, this ratio depends much on its current market prices. If the market price of the company somehow deteriorates, all the related ratios which show a very rosy picture as for now will worsen. Therefore, a higher margin of safely is required before investing in the company.(Wu, 2016)

RBI’s easing structure for finance may decline the Net Interest Margin of the company. For better quality company this will force a good competition in the market especially in the retail segment. However, the decline in net margins may be offset by a higher loan growth.(Wu, 2016)

HDFC will continue to generate heavy income in coming years estimated which will not only lead to economic growth of the company but of the whole country as well. The bank has the ability to maintain it strong growth potential and heavy earnings. The expansion of its deposit base allows it to maintain the low-cost funding and maintain its profitability. Liquidity is also strong as compared to earlier years.(Wu, 2016)

There is a lot of scope for growth and expansion of the company in long-term which will add to the shareholders wealth. The bank major target which comprises people from upper and middle classes are allowing the bank to get benefitted from its various policies and new funding and deposit plans which increases the chances of its financial betterment.(Wu, 2016)

Equitymaster.com, 2016. HDFC Bank Fact Sheet. [Online] Available at: https://www.equitymaster.com/stock-research/financial-data/HDBK/HDFC-BANK-LIMITED-Detailed-Share-Analysis [Accessed 22 May 2017].

HDFC, 2015. HDFC BANK LIMITED-PROFILE. [Online] Available at: https://www.hdfcbank.com/aboutus/News_Room/hdfc_profile.htm [Accessed 22 May 2017].

HDFC, 2016. HDFC-Annual Report 2015-16. [Online] Available at: https://www.hdfcbank.com/assets/pdf/HDFC-Annual-Report-2015-16.pdf [Accessed 22 May 2017].

Wu, M., 2016. HDFC Bank: Not a recommendation at current price. [Online] Available at: https://www.morningstar.in/posts/38366/hdfc-bank-not-a-recommendation-at-current-price.aspx [Accessed 22 May 2017].