Dewan Housing Finance Corporation Ltd (DHFL) is the third largest housing
finance company in India with a market share of ~4%. With a focus on the low
and medium income (LMI) consumer segment, the company has increased its
presence in tier-II & III cities where the growth opportunity is immense. With strong asset
quality and healthy return ratios, the company is all set to witness its next leg of growth.
DHFL is the 3rd largest private sector housing finance company with a scalable
business model: Given the present declining interest rate scenario, the housing
finance industry is likely to emerge stronger. After delivering 39% AUM CAGR
over FY2010-15, we expect DHFL to grow at a CAGR of 20% over FY2015-18, as
demand for housing in the middle & low income group is expected to pick up,
which is the focus area for the company. Backed by stable asset quality and firm
margins, DHFL has reported a 32% CAGR in PAT over FY2010-15 and we expect
the same to grow by 21.3% (CAGR) over FY2015-18.
Seasoned and granular loan book with stable asset quality: DHFL is a pioneer in
the home loan business with nearly three decades of experience and has achieved
strong underwriting skills. Individual borrowers account for 75%, while the high
yielding loan against property (LAP) and projects loans account for 16% and 8% of
advances, respectively. The company has increased its average ticket size from Rs0.59mn
in FY2011 to Rs1.2mn by FY2015, while it has brought down its loan-to-value (LTV) from
61.8% to 46.9% during the same period. Despite strong loan growth, the GNPAs and
NNPAs of the company are likely to be at ~1.05% and 0.71%, respectively, for FY2016.
We don’t expect any major deterioration in the asset quality going ahead.
Lower cost of funds will help maintain NIM: After its rating having got upgraded
to AAA from AA+ earlier by CARE the incremental cost of funds for the company
has come down and is likely to continue to remain favorable. Nearly 70% of the
bank borrowings are due for maturity over the next three years and swapping a
part of that with non-convertible debentures (NCDs), where it has ~100bp cost
benefit, will help DHFL in maintaining its NIM at ~2.86%.
NHB’s move to reduce risk weightage will help further leveraging: The National
Housing Bank (NHB) has recently revised LTV to as high as 90% for home loans
upto Rs30lakh against Rs20lakh earlier and reduced the risk weightage on the
same to 35% vs 50% earlier. This move will give a fillip to the affordable home
segments. DHFL being a key player in this segment will be able to growth its
balance sheet by further increasing its leverage, with lower incremental capital
requirement. Further the promoters have subscribed warrants worth Rs500cr,
which will improve the CAR (which currently stands at 16.4%).
Outlook and valuation: We expect the company to post a healthy loan book
CAGR of 20% over FY2015-18E, which is likely to translate in an earnings CAGR
of 21.3%, over the same period. The stock currently trades at 0.8x FY2018E ABV.
We recommend a Buy on the stock, with a target price of Rs270.

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