Among some of the bold decisions that the new government has pushed through recently, despite the diversionary tactics of its political adversaries is the repealing of the Urban Land Ceiling Act. This is expected to release additional stock of land to the market and rules out a rise in the real estate prices in the near future. The inventory holders may therefore have to abandon their wait for further increase and start pushing their stocks. The prices of flats had already bottomed out in many metros towards the end of 1998 and this new development would perhaps stimulate many of the now hesitant buyers into buying action. While the impact of these developments on the real estate companies who may be sitting on unsold real estate stock at old prices may not be positive, companies in Housing Finance Sector will without doubt see a growing demand from prospective flat buyers looking for finance. HDFC is the dominant player in the industry and the slow down of Citi Bank's Housing Finance and the fall of some of the lower end private sector Finance companies has made its position even stronger.

HDFC recently announced its third quarter results in the current financial year. As per the unaudited results announced for the 9 month period ending December 1998, the net profit of the company touched Rs 60.36 crores compared to Rs 47.89 crores in the corresponding period last year showing a growth of 26 %. The total income of the company also grew by 49 % to Rs 312 crore compared to Rs 209.2 crore in the previous comparable period. For the third quarter alone the interest income grew by 25% to Rs 260 crore.

The share prices of the company however showed a small dip around Rs 2400 since some of the analysts observed that the third quarter results had actually dipped by around 17 % compared to the previous quarter. This was due to a higher interest expense during the quarter, which had increased by 83 % compared to the previous year.

However there was another interesting development in the operations of the company during the year. The company has decided to enter the lucrative Consumer Finance area after April 1999. The excellent reach amongst the middle income households in the country and the network of offices provide HDFC a unique strength to exploit this high volume market. This decision seems to have come about after the joint venture with GE capital in Countrywide Consumer Financial Services seems to have fallen through. True to its MNC heritage, GE capital, which had 55 % stake in this company, has opted to buy out the HDFC stake as well . This may however be a blessing in disguise for HDFC which now has an opportunity to diversify to this parallel area of Finance.

The entry of HDFC in to short term Consumer finance would provide a better balance to its loan portfolio and an opportunity to exploit the retail Fixed Deposit Market which is a huge source of medium term finance for such companies. Both the Consumer Finance and the Deposit Markets present a vast opportunity due to the void created by the closing down of many NBFC s which were earlier active in this field.

The cumulative disbursements of HDFC in the last five years is over Rs12500 crores which provides a strong foundation for the company to launch its thrust in the new product segment. With the real estate market taking a turn for the better, HDFC appears to be on the threshold of another growth phase. Even on a large capital base of Rs 119.1 crore, the shares of the company enjoy a book value of Rs 1492 and EPS of Rs 235. The current share price of Rs 2400 represents a P/E of around 10. Even though this is one of the highest in the industry, its pre-eminent position in the industry and the fact that the 52-week high was around 4742, indicates that the share still has a potential to appreciate. Since the share is also an active scrip from the trader's point of view, the expected general improvement in the index shares should also keep the share buoyant.

Na.Vijayashankar

(naavi@vsnl.com)

January 16, 1999