Dewan Housing Finance Limited


(Nelson) #1

I had posted this in the short term opportunities area but I feel this has long term potential too

Dewan Housing (DHFL)

DHFL (Dewan housing) looks interesting to me. They are having a portfolio approach to lending where different subsidiaries cater to different customer niches differentiated on the price of the dwelling unit. It concentrates on Tier 2, and 3 areas where the competition is not that intense. They have a pan India presence. It is a dominant player in the low and middle income group. It also has tie ups with various banks like Yes bank, UBI, CBI, Pun & Sind Bank. It also cross sells insurance to its customers besides offering technical consultancy and management to developers and self construction clients in Tier 2 and Tier 3 locations.

Due to the sentimental effects of not defaulting on a home loan for fear of losing one’s home, the defaults are few and this reflects in the asset quality with net NPAs of 0.13% at the end of Q1 FY 2013. The NIMs are stable and are usually around 2.8% mark. ROE has hovered around 20% for the last 3 to 4 years. ROA is around 2%.

Borrowing costs have moved up in the last year at 10.85% due to the monetary policy adopted by RBI in line with inflationary pressures. The provisioning coverage is at 106.1%

CAR as of Q1 is 17.58% while Tier 1 ratio stands at 13%.

The company is also in the process of acquiring First blue home finance which caters to upper mid-income customers as opposed to the traditional clientele of low to mid income customers served by DHFL. So it offers lending at different price points/average ticket sizes thus comprising a full service offering across income spectrum.

Further details can be found here:

CRISIL report:

http://www.moneycontrol.com/mccode/news/article/article_pdf.php?autono=739908&num=0

Q1 FY 13 results:

http://www.dhfl.com/wp-content/uploads/2012/07/DHFL-Group-Earnings-Update-Q1FY13.pdf

Also did a relative peer comparison with LIC HF:

Total assets of LIC HF: 53552 crores vs 18985 of DHFL

Market Cap of LIC HF: 12028 crores vs 1927 crores for DHFL

It is below book value currently and has TTM P/E of around 6 so it is available dirt cheap

I know this is very simplistic and requires further digging and analysis. This is where I request the experienced boarders to comment on the suggestion. IMHO this could also qualify for a longer term holding stock because the market size is huge particular in the Tier 2 and 3 locations of India. Awaiting your replies…


(Vinod MS) #2

Hi,

Kuntal Sharmaâs nudge in the Gruh finance thread and my own existing investment in DHFL (holding since 10 months) has lead me to sit and dig the data for a stock analysis on DHFL.

I had worked in the homeloan industry for over 7 years. The home loan business is largely stable and predictable. I think the market potential is huge in the housing sector as documented clearly in the presentations by HDFC, GRUH and DHFL. A focused management with calculated aggression in sales, strong credit appraisal & property appraisal skills and good cash-flow management skills will do well and grow consistently for more than a decade. I think NBFCâs share of this market will remain above 30% on an average with banks lacking similar focus and strengths to completely wipe them out.

Here is my effort to compare DHFL with similar NBFCs â LICHF and GRUH

A snapshot.

Branches

5 yr loan book CAGR

5 Yr PAT CAGR

ROE

ROA

LICHF

188

29%

24%

19%

1.60%

GRUH HF

120

24%

32%

34%

2.20%

DHFL

194

55%

35%

18%

1.20%

DHFL has been growing its loan book at an impressive 55% CAGR for last 5 years. The ROE and ROA are not as good as the other two. But during this growth phase it also had to raise equity many times to keep the CAR in line.

Now letâs see the interesting Q-1 results comparison to understand where each com stands as of now. I believe the Q-1 results are a good representation of what will happen this year. Growth figures are all yoy.

Loan Book Cr

NP growth

Disb growth

Loan Book growth

Net Int Inc growth

Gross NPA

Cost/Inc

Cost of Funds

LIC HF

65000

-11%

35%

24%

-2.90%

0.71%

13%

9.58%

GRUH HF

4349

30%

37%

29%

8.33%

0.68%

20%

9.93%

DHFL

21400

18%

68%

40%

36%

0.93%

36%

10.60%

Letâs compare LICHF and DHFL first. LICHF had a negative growth in net profit inspite of a 24% growth in loan book and inspite of a lower gross NPA, great cost/inc ratio and lower cost of fund (it got a bounty from its parent). Why is this so? The likely answer is in the below table.

NIM

Fee Inc cont to op inc

LICHF

2.18%

1.60%

GRUH HF

4.64%

9.50%

DHFL

2.81%

23%

LICHF had a decline in fee collection in Q-1 due to the prepayment penalty waiver. In general it has a lower fee collection capacity from its segment of customers. Its net interest income had a degrowth too due to lower NIM.

DHFL has a superior Net-Int-Margin inspite of a higher cost of fund. It has sold its products at a higher rate and has a very reassuring source of income in fee collection contributing 23% to its income. DHFL is also successful in cross-selling insurance products of other cos. They have a non-retail portfolio of close to 18% compared to less than 10% of LICHF. This might sound risky, but I have explained why it may not be. Due to the above they have better NIM of 2.81% and impressive fee income contribution of 23%.

The growth momentum is also favoring DHFL with a 68% growth in disbursement leading to 40% growth in loan book. Yes, the base is lower, but in this market it has beaten all the other players in disb growth.

The gross NPA figures are mentioned in the table above. I believe anything less than 1% is comfortable. Their provisioning has been conservative with a reserve fund in excess of the required provision amounts. These are the points I liked in their lending norms which make me believe that credit risk will be managed well:

1) 65% customers are salaried class with loan to value ratio at 67%.

2) The installment to income ratio is at a comfortable 40% (only 40% of the customersâ monthly income goes into servicing the home loan EMI)

3) They do not outsource the legal appraisal and technical appraisal (valuation of the property to be funded). LICHF and SBI do outsource this critical aspect of loan sanctioning which leads to higher risk as per me.

4) 96% of their loan book is on floating rate basis. This leads to better interest rate risk management. Only 70% loan book is on floating rate basis for LICHF.

5) Average loan tenure is 8.5 yrs compared to average 6.5 yrs of liability tenure. Decent asset-liability match.

6) Loan to Value ratio is 40% for non-retail loans. This leads to high comfort in this riskier segment. This higher margin business is good and HDFC is also aggressively pursuing this with non-retail loans forming 33% now!

Why is DHFL growing at such pace in the last 5 years? One reason could be that there were critical changes in the management. A new CEO had joined and more importantly a younger chairman and MD with a better vision for the com is at the helm. The promoter family had bifurcated the business with HDIL going to one group and DHFL remaining with Mr. Kapil Wadhawan. I think this has lead to the company progressing to the next level. You can see the change in the annual reports itself. I like what the new CEO Mr. Anil Sachidanand has done so far and believe the Chairman & MD his giving him full support.

Here are the Bearish view points

1) Perceived negativities surrounding the group â the earlier mentioned change of guard should change this.

2) Lower rating by rating agencies compared to GRUH and LICHF affects its cost of fund. The rating should only get better in the future which could then be a huge positive.

3) Recent news of KP manipulating the stock for which I could not find any authentic confirmation of promoter involvement.

4) Regulatory restrictions in future leading to stricter provisioning or lending norms

5) Requires equity dilution to keep-up with the Capital Adequacy ratio which may not be that bad if other aspects of profitability are taken care of.

Interesting view points:

1) 13.5 Cr of teaser loan provisioning will get reversed in Q-1 FY 13 giving a fillip to the profit then.

2) The bank funding should get cheaper with new guidelines on priority sector lending to give out more loans below 6 lacs. DHFL will have a good share of such loans.

3) There is a board member from Caledonia Investment PLC after the acquisition of first blue home finance.

4) DHFL has securitized 1486 Cr of loan book. I think this will help increasing disb without affecting CAR which is at 17.6% now.

5) DHFL has tied up with Yes Bank, United Bank, Punjab and Sind bank and Central bank for distribution of home loans. These banks do not focus on home loans and I think itâs a smart move if executed well.

6) DHFL will merge first-blue home finance with itself. The merger should happen this FY itself (there was stipulation by the regulators for the same). I havenât calculated the EPS impact of this. The DHFL shares were valued at Rs 320 to arrive at the swap ratio.

7) Cost-Income ratio will only come down as the loan book grows and the overheads get spread out across a higher income.

Here is my estimate on valuations based on CMP of all three cos as on 19th Oct

P/E

P/B

FY 13E P/E

FY 13E P/B

LICHF

15

2.12

15

1.91

GRUH HF

28

7.57

21

7.19

DHFL

8

1.09

6

0.94

Though GRUH finance has much superior NIM and NPA figures I believe at 7 times book it is grossly over-valued. I canât see the logic of it trading at a P/B valuation better than that of HDFC.

I believe DHFL is on a good wicket with able management and better business model compared to LICHF. I expect higher growth without dilution of asset quality from DHFL and think that the cost of funds will decrease going forward. With the interest rate cycle favoring the rate sensitives I think itâs a good investment at CMP or below. The target I have in mind is Rs 300 within 15 months.

Views invited from all. Please point out aspects missed in the analysis, mistakes in calcuation or conlusions and your views on the opportunity.

Cheers

Vinod M S

Cautionary statement: Though I have worked in the home loan industry this is my first investment analysis of a company in this sector. I am in my early learning phase as far as investment goes. Kindly do loads of due diligence before acting on my recommendation and using the figures mentioned.

Discl: Invested at Rs 200 forming 10% of my portfolio.


(Vinod MS) #3

Hi,

The tables have come without the borders after posting. The last tabel is not readbale. See if this helps

P/E P/B FY 13E P/E FY 13E P/B
LICHF 15 2.12 15 1.91
GRUH HF 28 7.57 21 7.19
DHFL 8 1.09 6 0.94

(Vinod MS) #4

A small correction in the previous post. Under interesting view points pls note that the teaser loan provision reversal will happen in Q-1 FY 14…which I wrongly mentioned as FY13.

Thank You


(Manish Vachhani) #5

Hi Vinod,

Good effort. Keep it up.


(T Anil Kumar) #6

Excellent analysis Vinod

Any thoughts on what can go wrong with this company/sector.


(Vinod MS) #7

Hi, DHFL half yearly results are out.

There is an excellent investor presentation with lots of useful data and info here http://www.dhfl.com/investors/financials/financial-results/

The highlights:

>Total income up 43%, PAT up 19%

>ROA up for 6 months at 1.80%, ROE at 18.66%

>NIM continues to improve and is now at 2.84% for the 6 months

**>Gross NPA is down and is at a comfortable 0.69% now. **

>Loan book grew by 38%

Anil Bhai,

I have mentioned the bearish view points in my earlier post (the long one withe the stock story). Pls check and let me know if you require any further info. Frauds like the one which happened with LICHF (which only lead to a temporary downslide) can happen, but I think in the current environment and with strong regulations chances are very less.

Cheers

Vinod


(Excel Monkey) #8

Hi Vinod this is what I had mailed to some of our valuepickr friends in the first week of August

I stopped following this name after they acquired First Blue now the valuations have become so low that I was forced to again take a look at this name

I hope you are familiar with Dewah Housing

DHFL is the third largert mortgage finance company with focus on mid and low segment this segment is undeserved and commands a higher yields compared to normal home loans

because of lower tick size the cost to income ratio is higher as compared to HDFC or LIC housing

though DHFL yields are higher they have been generating a ROA of 1.4% which is lower that of HDFC and LIC the reason for the same is their higher cost of funds which is about 100-150 bps higher as compared to other two players

the difference arises because of the credit rating

DHFL has a AA credit rating where as both LIC and HDFC are rated AAA

though their Tier1 ratio is healthy 13% and LTV is around 65% rating agencies are still vary of offering them more favourable ratings

If the rating agencies review them which logically they should once their assets cross a threshold of 30K crores rating agencies rerated LIC when it crossed 28K crore mark

as of end of FY2012 they had total assets of around 27K crores and a loan book of around 25K crores which is poised to cross 30K crore mark next year

If you go through their conf calls one of the reasons management gives for acquiring first blue was to scale the size of book quickly and gain AAA rating

currently they are doing a ROE of 17% on full equity and 20% on adjusted equity (taking out the goodwill they paid for first blue)

their ROE would explode to 25% on full equity and 30% on adjusted equity (taking out the goodwill they paid for first blue) if they are able to attain a AAA ratings

this business is a very high margins business

even better than HDFCs core mortgage business (taking out their high margin builder loans) it is like subprime kind of loans but very safe as the LTV is very conservative

currently DHFL quoting at P/Adj book of 1 times FY 2012 and P/Adj book of 0.9 time

DHFL can easily command a P/B of 3 if the rating story materialises

the same might take a year or two but I think eventually they would eventually attain a AAA

Corporate governance Wadhawan cousins have split is a good thing which has happened to DHFL

controversial HDIL is owned by cousin and I would say it is good riddance

the entire focus of the management lead by Kapil Wadhawan is now on DHFL

they sold their retail business a few years back

I have gained more and more comfort with the management after goinng through conf call transcripts

they are merging First Blue with DHFL

the minority stake holders of first blue (Kapil and a fund) would be allotted 10.8 crore shares of DHFL for their 350 crore investment

that is average cost of Rs. 320 per share for them in DHFL

this decision is minority friendly

concerns: the company has been named in an IB report (as reported by media) as one of the stocks being manipulated by Ketan Parekh

company has denied the same and the stock has corrected since

do let me know if you would like to see a detailed broker report on the name?

Disclaimer: kindly assume that I have a vested interest in whatever I say. Please do your own due diligence


(Vinod MS) #9

Manish Bhai, thank you for the kind words…will try by best to keepup.

Hi Excel,

Nice writeup on DHFL. Agree with you on the positive outlook for the com. At 0.69% gross NPA the book quality is excellent - better than all the others including HDFC.

This is commendable with them lending 80% of their loans to semiurban/rural customers with a higher spread. Their ability to charge higher interest and squeeze out high fee income by cross-selling insurance and other services augurs well for them. This will give huge comfort when the interest rate fluctuations affect other more interest-income dependant competitors.

As you said I think a AAA rating should comeby with this quality of business. That plusa lower cost-income ratio due to growing loan book and higher share of project loans to builders will only increase the NIM going forward. People overlook the fact that HDFC’s loanbookhas a 33% builder+commercial loansshare which is driving the NIM.

I see rerating happen within 15 months.

What is your Fy13 expected EPS calculation considering First Blue merger?

Cheers

Vinod


(Kuntal Sharma) #10

Thank your Vinod and ‘Excel’ for the facts and analysis. This has strengthened my conviction and will now give it a year for further review. Hopefully patience will pay.


(Ayush Mittal) #11

Hi Vinod,

Very nice write-up. Will keep a tab


(Vinod MS) #12

Hi Ayush,

Thank you! Encouragement coming from you means a lot to me.

Cheers

Vinod


(Vishal) #13

Hi,

I had looked at the company in 2009 when I was looking at housing finance companies. I also met some people in the company, but decided to drop it after poor feedback from my contacts in mumbai builder/ construction business. Please be careful before making it a long term position.

Regards

Vishal


(Vinod MS) #14

Hi Vishal,

Thank you for the inputs from your contacts. Will be very helpful to all if you could give specifics as to what was the negative feedback about.

Thank You

Vino


(Vishal) #15

Hi Vinod,

Difficult to share exact details, but my contacts were heads of listed construction/ realty companies. Mostly about promoter integrity, which is relevant in any company but especially in finance companies.

Thanks


(Vinod MS) #16

Hi Vishal,

Thank you for sharing the same. HDIL is the construction com of the said group which probably has some negative sentiments about the promoter. Earlier the promoters were same. DHFL is available at such low valuation due to this negativity.

But as mentioned in my first post there was a bifurcation of these two cos b/w the cousins.

I look at it as a opportunity to buy now, the stock should do well if it consistently performs and once the market realizes that shadow of old promoter group is not there it should do very well. Unlike construction business I do not think there is too much scope for promoter “adventures” in this closely regulated industry.

Will monitor this very closely.

Thank You

Vinod


(Vinod MS) #17

Hi,

There is a nice writeup in the latest Business-India mag about DHFL and its promoters.

What is interesting is that the “negative perception” is also mentioned in this article and it states that the management is aware of the same and is trying its best to distance itself from HDIL.

Members interested in this stock should definitely read this.

Cheers

Vinod


(HG) #18

price tanked suddenly towards the end of the day. Any idea why?


(Vinod MS) #19

Hi HG,

Couldnt find anything com specific. I have exhausted my allocation target for this, otherwise would have bought some more.

Lets see…

Cheers

Vinod


(HG) #20

I just happened to be looking at it - was quite a sight for me. 196 one sec, 180 the other!