Cover story: HDFC's Construction Overdrive [Pg 1]

With forays in insurance, mutual funds, broking, and value-added real estate services, the housing finance major is scripting a diversification story. Here's a preview of the house CEO Parekh is building...

I can sit on the file for a month before presenting it to the board if you are going to launch a scheme by then.'' The caller isn't a venal employee offering to short-change his company for some incremental external gratification. It's a senior executive in charge of the super-annuation scheme of a company that has just decided to launch one. The man taking the call is the CEO of one of the three companies that received certificate of registration from the Insurance Regulatory and Development Authority (IRDA). His name is Deepak Satwalekar, the company he heads is called HDFC Standard Life Insurance, and his phone hasn't stopped ringing since that day. One caller is the head of an educational institution with over 45,000 employees wanting to know if HDFC Standard Life can write out a group policy (with two of its policies launched on December 13, the company now can). Another wants to know if the company can do a insurance plus housing finance deal for 30,000 agriculturists in rural Karnataka. Not surprisingly, a huge grin is a constant fixture on Satwalekar's face these days. ''These people,'' he admits, ''aren't calling us because we are the first private sector company in this business. They are calling us because they are comfortable with HDFC.''

Not far from Satwelakar's temp-quarters-he's moving out to a HDFC Standard Life building soon-on the fifth floor of HDFC's Ramon House office in Mumbai's Churchgate area, HDFC's Chairman Deepak Parekh is meeting with some businessmen. The topic of discussion is Intelenet, HDFC's 50:50 JV with Tata Consulting Services (TCS) that will operate back-offices and call-centres. One of the businessmen promises to bring in business for the call-centres. His price? Some equity. Arrangements like these could necessitate the formation of Intelenet subsidiaries, where individuals or companies that bring in business have a stake, but Parekh doesn't want to rush things. ''HDFC is still learning this business,'' he tells the businessman and promises to get back to him. But the issue raised by the businessmen, is among the ones being discussed by the Intelenet core team in a conference room on the same floor.

It's finally time for Act II of HDFC's diversification drama, one that will make the company the financial services supermarket Parekh always wanted it to be. And it has taken some time coming: the rash of new businesses unveiled by the company come seven years after it entered the banking sector with HDFC Bank, which now boasts the second highest market capitalisation among banks (after the State Bank of India). Thus, in late June, it signed an MoU with TCS for the creation of Intelenet. In August, it launched HDFC Asset Management, which raised Rs 650 crore for three plain vanilla schemes in a bear market. In November, it kicked off HDFC Securities, a brokerage that had managed to sign about 5,000 customers by the beginning of December. The same month, the IRDA bestowed HDFC Standard Life with a certificate of registration. Now, in association with the State Bank of India, the company is setting up Credit Information Bureau India Limited (CIBIL), a service targeted at helping the various HDFC businesses, and external customers maintain their quality of assets. ''HDFC is investing in businesses based on the opportunities it sees in them,'' says Parekh. ''We are trying to build value for our shareholders.''

And all the new businesses stand to reap the benefits of the HDFC brand. Avers Aditya Puri, CEO, HDFC Bank (he joined the bank in 1993, but told Parekh that the decision was subject to the bank being called HDFC Bank and not Bombay International Bank): ''The HDFC brand gives you a head start. The group runs on the same philosophy: the desire is to provide the customer with an entire range of financial services, irrespective of the entity he first contacts.''

To cut to the chase, the new businesses HDFC has targeted boast better market-opportunities than the company's bread-and-butter business, housing finance. Says Amit Rajpal, an analyst at JM Morgan Stanley: ''The sizes of the life insurance business and asset management market are eight and six times, respectively, that of the mortgage market. Hence, even a small marketshare in these businesses could mean a significant revenue contribution.''

Not right now, though. Insurance, for instance, is a business that could payoff for HDFC Standard Life a few years down the line. Initially, the company will offer two off-the-shelf products in 14 pre-packaged forms. Over time, explains Satwalekar, ''our products will be driven by what customers want.''

The HDFC family's emphasis on the customer is already evident in the way some of its companies operate. HDFC Bank offers a variety of services ranging from serving as a financial advisory, through distributing insurance and mutual fund products (synergy ahoy!), to taking care of payments like utility and credit card bills. And HDFC Securities offers its customers the option of interfacing with the company in whichever way suits them. ''Any gateway that a customer prefers to use to deal with us is open to him,'' affirms Girish Bhagat, CEO, HDFC Securities.

Part of the success of the new business will depend on how well they leverage the distribution networks of the existing businesses. Explains Renu Karnad, Executive Director, HDFC: ''We have a database of 1.2 million depositors and 800,000 borrowers. We can cross-sell our offerings to this audience. The opportunity to leverage this and become a distribution house is phenomenal.'' As a first step, HDFC will sell its own products and those of its associates. Eventually, it could vend offerings from other companies. ''This,'' says a research report on HDFC published by DSP Merrill Lynch, ''could emerge as a profitable business in the long-term.'' The cross-selling bit has already started; the next step is to merge internal operations so as to present a unified face to the customer. Says Satwalekar: ''Each of the companies has started operations at a different point in time, but is heavy on technology. We are trying to create a middleware that can work across systems. That way when a customer receives a statement of account it will show transactions with all other companies in the group.''

The numbers speak for themselves. The housing finance business accounts for 78 per cent of HDFC's total asset base of Rs 15,084 crore. And it continues to grow: for the six months ended September 31, 2000, loan disbursements stood at Rs 2,484 crore, 32 per cent higher than the Rs 1,888 crore disbursed in the same period last year. Low property prices, increasing disposable incomes and the tax breaks that housing loans come loaded with should help the company maintain this rate of growth. Avers Parekh: ''We will continue to grow in the housing finance market, but it will be impossible to maintain a high marketshare when other players enter the market.'' That's only to be expected. The DSP-Merrill Lynch report says: ''On an incremental basis, HDFC's marketshare is likely to fall from 57-58 per cent levels to 48-50 per cent mark over the coming years that will result in its overall marketshare falling from around the current 55 per cent to around 51-52 per cent levels. But we expect it to stabilise at these levels.''

HDFC: the financials
	1995-96	1996-97	1997-98	1998-99	1999-2000
Gross income	982.18	1,265.33	1,444.68	1,752.73	2,015.56
Net Profit	195.69	247.89	293.36	333.90	401.81
Approvals	2,071.46	2,521.70	3,251.27	4,071.76	5,305.15
Disbursements	1,683.55	2,100.78	2,753.61	3,424.27	4,492.74
Figures in Rs Crore

That shouldn't be too difficult for HDFC: it has the edge of being able to operate with a spread on loans (the difference between the interest rate and the cost of borrowings) as low as 1.84 per cent. Avers Keki Mistry, Managing Director, HDFC: ''HDFC has been able to operate on low margins because of its low cost structure.'' The company's expense to asset ratio is just 0.49 per cent; cost to income ratio, a mere 13.8 per cent.

What's more, HDFC is piggybacking on its expertise in the real estate domain to offer value-added services like the discounting of rent receivables (current portfolio: Rs 300 crore) and property valuation. The company also holds a 25 per cent stake in a joint venture with Wybridge Corporation (a franchisee for KFC and Pizza Hut) to set up a chain of fast-food outlets across the country. HDFC's revenues will arise from a fee on advisory services rendered to the venture towards identifying real estate, or from simply buying the properties and renting them out to the venture. The company is offering similar advisory services for the multiplexes being built by Zee head honcho Subhash Chandra.

Then there is the net. At the apex of the company's wired initiatives is property portal www.hdfcrealty.com (formerly www.propertymartindia.com), a JV with e-Mahindra (part of M&M) targeted at proving a range of real estate services online. Today, the VORTAL has 7,500 properties listed across six locations (to become 14 in the next three months). HDFC, expectedly, will help customers with everything from legal advice to finance. Next year, the company hopes to sell 400 apartments online. And to overcome the prickly issue of connectivity kiosks from where customers can access the site are being set up in a few branches of HDFC Bank and some Shoppers' Stop outlets. Soon, hdfcrealty will host value-added information that will help customers avail the services of vaastu consultants, interior designers, and packers and movers.

As part of its treasury operations, HDFC has also invested in a few dotcoms like ipfonline, schoolnetindia, equitymaster, and indiaconstruction. The actual amount invested thus (Rs 50 crore) is a mere fraction of the company's total treasury portfolio (Rs 3,318 crore), but if even one of these dotcoms clicks HDFC could hit the mother lode. Says Rajeev Varma, an analyst with DSP Merrill Lynch: ''These investments can help HDFC sustain a stream of capital gains in the coming years.''

So, what's Act III? Parekh simply says, ''we want to be in non-life.'' That's a logical extension, but it isn't going to be the only one on HDFC's radar. Or on Parekh's: he believes the future of the financial services sector will belong to a powerhouse of loosely networked companies driven by a common ambition and focussed solely on serving the customer. That federation-like structure is very much in evidence in HDFC's moves so far. Now each of these companies will just have to prove that it works.