Macquarie questions HDFC’s accounting

MUMBAI: In a sharply critical report of the country’s largest housing finance company, the equities research arm of Australian bank Macquarie has downgraded HDFC to underperform and has accused the mortgage lender of practicing “aggressive accounting policies”. HDFC, on its part, disagreed with all issues raised in the report and has clarified its accounting practices.The HDFC share closed at Rs 645 on Friday down by Rs 11 or 1.63% on a day the sensex was down 1.2%.
The report is by its own admission an “anti-consensus” opinion and in contrast to other analysts who assign high valuations to HDFC because of the quality of its loans and the various businesses it owns as a holding company. The issues raised by Macquarie include fall in home loan profitability, loans to developers bringing in 65% of profits, and the regulatory bar on prepayment hitting the company’s bottom line.
According to Macquarie, over the past two years, HDFC has been adopting aggressive accounting practices by passing provisioning through reserves and also making the adjustments for zero-coupon bonds (ZCBs) through reserves. In a report titled “The Last Bastion Falls” released on Thursday, Suresh Ganapathy and Parag Jariwala analysts with the Australian bank said: “We believe FY11 and FY12 earnings are overstated by 38% and 24% respectively and reported ROE would have been 600 and 400 bps lower at 16% and 18% respectively if the adjustments had been made through the P&L. In other words, earnings growth has been managed.”
Disagreeing with the report, HDFC said: “It is surprising that Macquarie in its report as recently as May 7, 2012, had put a price target of Rs 775 on HDFC’s 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 month.”
On the zero coupon bond issue, HDFC said that these are instruments through which it raises funds for investment in subsidiary businesses. Since under Indian accounting principles the income from subsidiaries (barring dividends) is not taken into account, HDFC is charging the interest costs on ZCBs to securities premium account. “If the proportionate share of profits of HDFC in its subsidiaries and associates is considered, the profits of HDFC will be higher by Rs 1,340 crore after reducing the dividends received from the subsidiaries and associates. Under these circumstances if the aforesaid interest costs on Zero Coupon Debentures are charged to profit and loss account, HDFC’s profits would still be higher by Rs 855 crore”.
HDFC also clarified that provisions for standard assets were not charged to profit and loss accounts because it was a one time requirement pertaining to past assets and is transitory in nature.