The company dismisses any problems in its accounting

HDFC, on Thursday, hit out at global brokerage firm Macquarie, saying the latter did not attempt to ‘verify the facts and statements' before raising concerns over its stock performance and accounting practices.

In a report published on Thursday, Macquarie Equities Research said that “a structural de-rating (of HDFC stock) is likely because the quality of earnings and RoE (Return on Equity) reported is being driven more by its corporate book and aggressive accounting practices.”

Alleging that the accounting practices were being used to inflate earnings and RoE, Macquarie said: “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.” It further said that HDFC's 2010-11 and 2011-12 earnings were overstated by 38 per cent and 24 per cent, respectively, and the RoE would have been lower for these years if adjustments had been made through the profit and loss account.

“In other words, earnings growth has been managed, in our view,” Macquarie said.

Reacting strongly to the report, HDFC said in a statement that its “management completely disagrees with the contents of the Macquarie report dated June 14 as the analyst concerned 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, 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 month's time,” the company said.

HDFC also dismissed any problems in its accounting, saying, “It needs to be understood that HDFC is both a housing finance company and a financial holding company. As a financial holding company, HDFC has been making investments in its subsidiaries and associates, namely, HDFC Bank, HDFC Standard Life Insurance Company, HDFC Ergo General Insurance Company and HDFC Asset Management Company.”

When asked whether they suspected some rivals or market forces behind the issues raised in the report, the HDFC officials declined to comment.

However, market sources said that rivals and market operators at times tended to take benefit of negative research reports to buy shares at lower levels.

Market regulator SEBI is already investigating certain other cases where research reports have been used by market operators to push up or pull down the share prices.

HDFC also said that it was surprising that Macquarie had changed its stance within a month, when no material changes had taken place.

In June 14 report, Macquarie has downgraded HDFC stock from ‘outperform' to ‘underperform', while lowering the one-year price target to Rs.550. HDFC shares, on Thursday, closed at Rs.644.60, down 1.63 per cent, on the BSE.

In the statement, HDFC further said: “Under the Indian GAAP, the accounts of HDFC are presented on a stand-alone 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 are not considered as part of HDFC's profits.” The company said it had invested 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 crore during 2011-12 had been charged to the securities premium account, as per 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 will be higher by Rs.1,340 crore after reducing the dividends received from the subsidiaries and associates,” it said.

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