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.
