PROJECT ON RATIO ANALYSIS OF

HOUSING DEVELOPMENT FINANCE CORPORATION LIMITED

Submitted to:

Dr. Sampada Kapse

INTRODUCTION:
Reforms have taken place in the banking sector since 1991 despite changes in the government. The Finance Ministry continuously formulated major policies in the financial sector such by giving licenses to private sector banks as part of the liberalization process opening of the insurance sector designing measures to increase financial soundness like introducing capital ade!uacy re!uirements and other prudential norms for banks limiting the entry of foreign banks etc. The banking system has evolved from the traditional banking practices of lending and deposits to other avenues such as investment banking insurance services etc. "oing for#ard banks that have ensured sufficient capital to sustain credit gro#th #ill increase focus on non funded income to sustain margins

CONTRIBUTION OF SERVICE SECTOR:

The service sector has been in the driver$s seat registering %&"R of '( in the last seventeen years #hich has been mainly contributed by the gro#th in trade hotels and transport storage and communication sectors. The gro#th of these segments has been the result of opening of trade liberalization of policies and increased disposable income in the hands of the people and changing consumer attitude and lifestyle. The table belo# highlights the contribution of the different sectors that have boosted economic gro#th directly or indirectly. )hile hotels and restaurants contribute least amongst the sectors discussed here banking * insurance and real estate * business services contribute the most.
% share in GDP at constant prices +otels * restaurants %ommunication .anking * insurance Real estate * business services FY0 1.,( -.9( /.0( 0./(

B!N"ING SECTOR IN INDI!:

.anking in 1ndia has attained fair amount of maturity in terms of supply product range and reach2even though reach in rural 1ndia still remains a challenge for the private sector and foreign banks. 1n terms of !uality of assets and capital ade!uacy 1ndian banks are considered to have clean strong and transparent balance sheets relative to other banks in comparable economies in its region. 3ince 1ndian economy is #itnessing strong gro#th the demand for banking services especially retail banking mortgages and investment services are e4pected to be strong. 5ne may also e4pect M*&s takeovers and asset sales. &ccording to a report by 1%R& 6imited a rating agency the public sector banks hold over 0, percent of total assets of the banking industry #ith the private and foreign banks holding 1'.7( and /.,( respectively

#DFC$S INCEPTION8 1n 199- the +ousing 9evelopment Finance %orporation

6imited :+9F%; received <in principle< approval from the Reserve .ank of 1ndia to set up a bank in the private sector as part of the R.1<s liberalization of the 1ndian .anking

3ector. The bank #as incorporated in &ugust 199- in the name of <+9F% .ank 6imited< #ith its registered office in Mumbai 1ndia. +9F% .ank commenced operations as a 3cheduled %ommercial .ank in =anuary 199,.

%E!NING OF R!TIOS:
& relationship bet#een various accounting figures #hich are connected #ith each other e4pressed in mathematical terms is called accounting ratios. &ccording to Kennedy and Macmillan >The relationship of one item to another e4pressed in simple mathematical form is kno#n as ratio.> Robert Anthony defines a ratio as ? >simply one number e4pressed in terms of another.> &ccounting ratios are very useful as they briefly summarise the result of detailed and complicated computations. &bsolute figures are useful but they do not convey much meaning. 1n terms of accounting ratios comparison of these related figures makes them meaningful. 1t is difficult to say #hich business concern is more efficient unless figures of capital investment or sales are also available. &nalysis and interpretation of various accounting ratio gives a better understanding of the financial condition and performance of a business concern.

I%PORT!NCE OF R!TIO !N!&YSIS: Ratio analysis does t#o things

immediately. The first thing is it allo#s the company to compare itself #ith other like companies. 1f management feels things aren<t going #ell they can help pinpoint the problem through comparing their ratios #ith other companies. They may have several ratios that are comparable but a couple #hich are #ay off. That might be #here the problem is. &lso ratio analysis may help by comparing your company #ith prior periods. 1f a particular ratio is declining #hen it #ould be better if it #ere staying the same or increasing then again looking at the ratios are important to find out #here the problem lies. Ratios are important to spot trends easily.

The report contains the ratio analysis of : 1; @arning Aer 3hare 7; 9ividend Bield Ratio C;Arofitability Ratios -; 6i!uidity Ratios ,; 6everage Ratios /; %overage Ratios 0; &sset Duality Ratios '; %redit to 9eposits Ratio
9; %omponent Ratios

1) Earning Per Share: .asic earnings per e!uity share is computed by dividing net
income by the #eighted average number of e!uity shares outstanding for the year. Bears E-2E, E,2E/ E/2E0 @A3 77.97 70.97 C/.79 3ource8 &nnual report of +9F% .ank E02E' -/.77

1FT@RAR@T&T15F2The @A3 of Rs1EG2 nominal value share has sho#n a consistent and healthy gro#th over the years and as compared to E-2E, it has become about 1E7(. This sho#s strong foundation of the bank to achieve this gro#th rate by increasing the net income from Rs //,./:lacs; to Rs.1,9E.7:lacs; and shares from 79 EC 'C 9-/ toC- -E 7E 970.This helped the bank to meet the financial needs mostly from its retained earnings and avoided the need to avail capital at a cost from the market. 3o the bank #as in position to utilize funds efficiently to improve the financial position of bank. Quarterly comparison of EPS: Duarters Mar2E' =un2E' 3ep2E' @A3 1C.79 1E.917.-7 3ource8+ttp8GGmoney.rediff.comGmoneyGjspGratio.jspH company%odeI1-ECEE,, There is volatility in the !uarterly @A3. "ross profit reduced from Rs.1E''.0E:lacs; in Mar2E' to Rs.1E70.,1:lacs; in =un2E' . This sho#s the bank also suffered from the global crisis that has badly hit the economies of the #orld and also during these periods the banks had increased the Fi4ed 9eposit rates from 9.,( to 1E.,( p.a. &lso the note#orthy thing is that the employee e4penses in Mar2E' #ere Rs.C-,./:lacs; and Rs./11./C:lacs; in 3ep2E'

2) Dividend yield82 The o#ners of the bank are re#arded in form of dividend #hich is
attributed from the profits. This keeps the o#ners motivated as they believe that their hard earned money offered to bank is being efficiently utilized and they are getting returns on their investments Bear E-2E, E,2E/ E/2E0 E02E' 9ividend:(; -, ,, 0E ', 3ource8+ttp8GGmoney.rediff.comGmoneyGjspGratio.jspH company%odeI1-ECEE,, 1FT@RAR@T&T15F2"ro#th in dividend #as due to the e4pansion in business activities. Fot only the interest income has increased but a substantial increase in other income is also seen. The income other than interest gre# from Rs 117C9':lacs; in E,2E/ to Rs 77'C1,:lacs; in E02E'. This is attributed by the changing lifestyles of people #hich no# don$t vie# bank as a source to avail loans or deposit money but as an entity that takes

care of many of their financial transactions and they are also availing the value2added services of banks like auto payment of bills on standing instructions fore4 services advisory services etc.

3) Profitability ratio2The objective of profitability relates to a company$s ability to earn

a satisfactory profit so that the investors and shareholders #ill continue to provide capital to it. & company$s profitability is linked to its li!uidity because earnings ultimately produce cash flo#. For these reasons ratios are important to both investors and shareholders. J Operating Margin2 5perating margin is a measurement of #hat proportion of a company<s revenue is left over after paying for operating e4penses . & healthy operating margin is re!uired for a company to be able to pay for its fi4ed costs such as interest on debt. Bear E,2E/ E/2E0 E02E' 5perating Margin 79.,/ CC.1, CE.0' 3ource8+ttp8GGmoney.rediff.comGmoneyGjspGratio.jspH company%odeI1-ECEE,, 1FT@RAR@T&T15F21n E,2E/ the operating margin ratio #as 79.,/( as the company had incurred Rs.1/91E9:lacs; on operating e4penses for infrastructure and staffing in relation to the e4pansion in the branch net#ork and gro#th in the retail loan and credit card businesses. 1n the ne4t year it has sho#n improvement #hen the bank spent Rs.7-7E'E:lacs; on the operating e4penses as its operating income increased from Rs.10CC,0 to Rs.7,/C91:lacs;. &nd the ratio diminished again in E02E' as the operating e4penses #ere Rs.C0-,/7:lacs; and operating profit #as Rs C0/,-1:lacs; #hich is a result of increase in operating e4penses from -9.C'( in E,2E/ to -9.'0( of the net revenues. J Net Profit Margin 2Fet profit divided by net revenues is called Fet profit margin Bears E,2E/ E/2E0 E02E' Fet Arofit Margin 1,.,, 1C.,0 17.'7 3ource8 +ttp8GGmoney.rediff.comGmoneyGjspGratio.jspH company%odeI1-ECEE,, 1FT@RAR@T&T15F 21n E,2E/ the FAM is 1,.,,( as the bank had efficiently converted its revenues into actual profits and sho#ed an effective cost control. +o#ever in the subse!uent year it reached 1C.,0 as the net profit as a percentage of net revenues came do#n from 7,.-C( to 77.9E(. &nd further in E02E' the FAM has diminished and net profit to net revenues came do#n to 71.10(. 6o#er net profit margins have lead to a reduction in the returns to the investors. .ut this reduction is not an outcome of

inefficiency but the bank has to spend more on operating e4penses to counter the competition from other banks and the margins of profit have s!ueezed. J Reported Return On Net Worth8 This ratio indicates ho# profitable a company is by comparing its net income to its average shareholders< e!uity. The ratio measures ho# much the shareholders earned from their investment in the company. The higher the ratio percentage the more efficient management is in utilizing its e!uity base and the better return is to investors. Bear E,2E/ E/2E0 E02E' Return on net #orth 1/.-C 10.01C.'C 3ource8 +ttp8GGmoney.rediff.comGmoneyGjspGratio.jspH company%odeI1-ECEE,, 1FT@RAR@T&T15F 1n the year E,2E/ R5F) is 1/.-C( and shareholders have been benefitted from their stake in the company in the form of fair returns. 1n that year the share capital #as Rs. C1C1-:lacs; #hereas the net income #as Rs. C-7-//:lacs;. 1n the ne4t year the ratio improved as there #as only Rs. /7,:lacs; increase in share capital #hen the net income increased by Rs.1,/EE,:lacs;. .ut again in E02E' there is a substantial reduction in the ratio #ith the infusion of Rs. C,E-:lacs; of share capital and the net income increased by Rs 7,7/C7:lacs;. 1ncrease in net income :(; :yoy; Rs :lacs; Bear E/2E0 E02E' Fet income -,.,, ,E./' 3ource8 &nnual Report of +9F% .ank 1ncrease in share capital :(; :yoy; Rs :lacs; Bear E/2E0 E02E' 3hare %apital 7 1E.90 3ource8 &nnual Report of +9F% .ank

4) Liquidity Ratio2 1t is used to determine a company<s ability to pay off its short2terms
debts and obligations. "enerally the higher the value of the ratio the larger the margin of safety that the company possesses to cover short2term debts. J Quick Ratio !cid Test Ratio"21t is an indicator of a company<s short2term li!uidity. 1t measures a company<s ability to meet its short2term obligations #ith its most li!uid assets. The higher the !uick ratio the better the position of the company. The !uick ratio is more conservative than the current ratio. )hen short2term obligations need to be paid

off immediately there are situations in #hich the current ratio #ould overestimate a company<s short2term financial strength Bear Duick ratio company%odeI1-ECEE,, 1FT@RAR@T&T15F 2The !uick ratio has been ,.1' in the year E,2E/ #hich indicates the bank$s robustness and financial soundness in paying off its short term obligations. 1t has reduced in the ne4t year but in the year E' it has increased. Rs :lacs; Bear E,2E/ E/2E0 E02E' Duick assets 1-00'C9E-//, /919EE %urrent liabilities -'C19/ ,C'19, 79E,99 3ource8 &nnual Report of +9F% .ank The figures indicate that there is e4cess li!uidity in the bank e4cept in E/2E0..ut the banks are under the guidance of R.1 and they have to follo# the li!uidity norms laid do#n by R.1. J #urrent Ratio2 The ratio is mainly used to give an idea of the company<s ability to pay back its short2term liabilities #ith its short2term assets. The higher the current ratio the more capable the company is of paying its obligations. & ratio under 1 suggests that the company #ould be unable to pay off its obligations if they came due at that point Bear E,2E/ %urrent ratio E.79 company%odeI1-ECEE,,. 1FT@RAR@T&T15F 2The ratio sho#s a decline due to the credit e4pansion increasing demand deposits and other liabilities. Rs :lacs; Bear E,2E/ E/2E0 E02E' 9emand deposits 1/1',09 19,'-'7 7'0,90E 5ther liabilities 0'-9-9 1C/'91C 1/-C191 3ource8 &nnual Report of +9F% .ank E/2E0 E02E' E.7/ E.7/ E,2E/ E/2E0 E02E' ,.1' -.E0 -.'9 3ource8+ttp8GGmoney.rediff.comGmoneyGjspGratio.jspH

3ource8+ttp8GGmoney.rediff.comGmoneyGjspGratio.jspH

5) Leverage Ratio2 & company<s leverage relates to ho# much debt it has on its balance
sheet and it is another measure of financial health. "enerally the more debt a company has the riskier its stock is since debt holders have first claim to a company<s assets. This is important because in e4treme cases if a company becomes bankrupt there may be nothing left over for its stockholders after the company has satisfied its debt holders.

J Total de$t%e&uity 2 1t indicates #hat proportion of e!uity and debt the company is using to finance its assets. & high debtGe!uity ratio generally means that a company has been aggressive in financing its gro#th #ith debt. This can result in volatile earnings as a result of the additional interest e4pense. Bear Total debtGe!uity E,2E/ 1E.,C E/2E0 1E./7 E02E' '.0/

3ource8+ttp8GGmoney.rediff.comGmoneyGjspGratio.jspH company%odeI1-ECEE,, 1FT@RAR@T&T15F 2There is gro#th of the bank and it is able to manage its funds from the internal sources. The e!uity capital has increased its share in the liabilities in balance sheet over 9E( in comparison to the outside debts. This helps the bank to maintain high credit reputation in market. Rs:lacs; Total liabilities /'7E/'/ '-'E7-/ 171/09C0 3hareholders e!uity ,799,C /-CC1, 11-907C 3ource8 &nnual Report of +9F% .ank

) !overage Ratio2 & coverage ratio encompasses many different types of financial
ratios. Typically these kinds of ratios involve a comparison of assets and liabilities. The better the assets >cover> the liabilities the better off the company is. J 'nterest #o(erage Ratio2 This ratio is used to determine ho# easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a bank<s earnings before interest and ta4es :@.1T; of one period by the bank<s interest e4penses of the same period. The lo#er the ratio the more the company is burdened by debt e4pense. )hen a company<s interest coverage ratio is 1., or lo#er its ability to meet interest e4penses may be !uestionable. &n interest coverage ratio belo# 1 indicates the company is not generating sufficient revenues to satisfy interest e4penses. Bear E,2E/ E/2E0 E02E' 1nterest coverage ratio 1.'0 1.9 1.09 3ource8 +ttp8GGmoney.rediff.comGmoneyGjspGratio.jspHcompany%odeI1-ECEE,, &lso Rs :lacs; Bear E,2E/ E/2E0 E02E' 1nterest e4penses8 1979,E C109-, -''017 @.1T 8 -C-,'1 /,7,-1 1E110,7 3ource8 &nnual Report of +9F% .ank

1FT@RAR@T&T15F 2The ratio for the year E/ is 1.'0 #hich is reasonable and not belo# 1.,.This indicates that the bank is in a sound financial health and is able to pay the interest on its outstanding debts. The ratio #as best in E/2E0 among the three financial years. .ut has reduced in the year E' to 1.09. 3till the bank has maintained a healthy ratio over the years.

") #$$et %uality Ratio8 The most important ratio for the stakeholders of bank is the
Fon2Aerforming &ssets ratio #hich is covered under the asset !uality ratio. This ratio sho#s the true picture of the !ualitative value of assets rather than the !uantitative value of assets Bear Fet FA& to Fet &dvances:(;8 3ource8 &nnual Report of +9F% .ank E/2E0 E.-C E02E' E.-0

1FT@RAR@T&T15F 2The ratio sho#s a decline. .ut comparing the components of the ratio the E.E-( decline has occurred #hen in the background the increase in loans given sho#s a C,( increase #hich means the bank has adhered to strict policies in allocation of funds and it has not been aggressive in allocating loans. Rs :lacs; Bear E/2E0 E02E' Fet FA& 7E7'9 79',7 Fet &dvances -/99-0' /C-7/9E 3ource8 &nnual Report of +9F% .ank

&) !redit to De'o$it Ratio (!D Ratio) 8 The ratio is indicative of the percentage of
funds lent by the bank out of the total amount raised through deposits. +igher ratio reflects ability of the bank to make optimal use of the available resources. The point to note here is that loans given by bank #ould also include its investments in debentures bonds and commercial papers of the companies. Bear E/2E0 E02E' %9 /'.0 /7.9 3ource8 &nnual Report of +9F% .ank &lso Rs :lacs; Bear E/2E0 E02E' &dvances -/9--0' /C-7/9E 9eposits /'79091EE0/'/E 3ource8 &nnual Report of +9F% .ank 1FT@RAR@T&T15F 2This ratio forms an integral part of analysis as it indicates the amount of reliability the bank has earned in the minds of its customers and evidence of its

robustness .The ratio for E/2E0 is /'.0. 1t has decreased in the subse!uent year as a result of global economic depression that has panicked the customers from making any ne# investments and so lesser credit is being asked for.

)) !o*'onent Ratio8 This ratio sho#s the components and their composition in the
business of the bank. 5ne such ratio is 6ong term assets to total assets. The high ratio indicates more investment in fi4ed assets that bank has purchased to continue its operations smoothly. Bear E,2E/ E/2E0 E02E' 6ong term assetsGtotal assets E.97 E.'9 E.91 3ource8+ttp8GGmoney.rediff.comGmoneyGjspGratio.jspH company%odeI1-ECEE,, &lso Rs :lacs; Bear E,2E/ E/2E0 E02E' 6ong term assets ',,E' 9///0 110,1C Total assets 0C,E/C9 917C,/1 1CC10//E 3ource8 &nnual Report of +9F% .ank 1FT@RAR@T&T15F 21n the year E/2E0 there #as a decline in the ratio #hich sho#s that the bank had more of investments and current assets. &nd as the company had e4pansion plans in the other t#o years the ratios are higher.