For 1QFY2017, Dewan Housing Finance Corporation (DHFL) reported a 16%
growth in PAT to Rs201cr, which is in line with our expectation. There has been a
decline in the company’s cost structure after many quarters, which we believe is
sustainable and would add to earnings growth going ahead. At the operating
level, the performance remained decent.
Loan growth remains decent: The company’s AUM as of 1QFY2017 end was up
20% on a yoy basis at Rs72,012cr. While sanctions grew by a moderate 12% yoy,
disbursements at Rs6,215cr witnessed a strong 26% yoy growth during the quarter.
The company securitized loans worth Rs1,152cr during the quarter and the
portfolio of securitized loans accounted for 12% of the total AUM.
Project loans growing faster than the overall loan portfolio: Loans to individuals
which account for ~71.5% of the AUM, grew by 15.2% yoy during the quarter.
The company continued to aggressively expand its non-individual loan book,
which is evident from the 93% yoy growth in loans to projects. The segment
accounted for 9.8% of the AUM compared to 9% at the end of 4QFY2016 and vs
6.1% in 1QFY2016. We believe the company will continue to expand the high
yielding developer loan book in the near term.
Asset quality marginally weakened but still comfortable: DHFL has been able to
maintain a stable asset quality over the last few quarters. During the quarter
under review, GNPAs rose to 0.98% vs 0.93% as at the end of 4QFY2016. On a
yoy basis, provisions were up 41%, which we feel is reasonable, looking at the
strong growth in non-individual loan book which is subject to stricter regulatory norms
in terms of provisioning. NPAs from the individual loans segment stood at 0.74%
while that from the non-individual segment stood at 1.24% (LAP, Project Loans, and
SME combined). We don’t expect any deterioration in asset quality in the near term.
Margins as well as return ratios likely to remain stable: Though the cost of funds
has declined, the yield too has come down in the last quarter due to competitive
intensity. This resulted in the NIM declining to 2.91% compared to 2.96% in
4QFY2016. We believe increasing exposure to the high yielding project loans and
LAP portfolio will enable the company to maintain its NIM above 2.9% levels.
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. Despite a 19% run up in the stock price since we
initiated coverage, the stock is still attractively valued at a little above 1x FY2018E
ABV. We maintain our BUY on the stock and retain our target price of Rs270.

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