OREANDA-NEWS. June 19, 2012. HDFC Management completely disagrees with the contents of the Macquarie report dated 14th June 2012 as the concerned analyst has not attempted to meet anyone from HDFC before making the aforesaid report and verify the facts and statements made therein. Moreover it is surprising that Macquarie in its report as recently as May 7, 2012 had put a price target of Rs.775 on HDFCs stock with an outperform rating based on the same facts and figures. We are therefore unable to understand as to what prompted the analyst to change his recommendation and outlook within a months time.

The point that has been raised in the Macquarie report regarding the adjustment for Zero Coupon Bonds is not new and has been clarified on several occassions by HDFC to its investors. It needs to be understood that HDFC Ltd is both a housing finance company and is also a Financial Holding Company. As a Financial Holding company HDFC has been making investments in its subsidiaries and associates namely HDFC Bank Ltd, HDFC Standard Life Insurance Company Ltd, HDFC ERGO General Insurance Company Limited, HDFC Asset Management Company Ltd etc.

Under the Indian GAAP the accounts of HDFC are presented on a standalone basis wherein only the dividends received from subsidiaries and associates are included as part of the income and its true share of profit in its subsidiaries and associates is not considered as part of HDFCs profits. HDFC has made its investments in subsidiaries and associates out of the amounts borrowed by way of Zero Coupon Debentures and therefore the interest cost on such borrowings amounting to Rs. 485 crores during the year 2011-12 (net of tax) has been charged to Securities Premium account as per Section 78 of the Companies Act.

For the year ended March 31, 2012, if the proportionate share of profits of HDFC in its subsidiaries and associates is considered, the profits of HDFC Ltd will be higher by Rs. 1340 crores after reducing the dividends received from the subsidiaries and associates. Under these circumstances if the aforesaid interest cost on Zero Coupon Debentures are charged to profit and loss account, HDFCs profits would still be higher by Rs. 855 crores.

Further as and when IFRS is made applicable under Indian GAAP, the overall profits will go up further as some of the expenses on borrowings and loan sourcing will require to be amortised instead of currently being fully charged to the Profit and Loss account in the year of payment.

Further the one time provisioning requirements in respect of standard assets is not reflected in profit and loss account as it relates to all the past assets and is transitory in nature. The interest rates on retail home loans are lower on account of lower risk weights, lower NPAs and also diversified risk profile.