I have been watching DHFL for quite some time now. I wanted to share my views and seek your comments:
It has some contingent liabilities on its book. From adjusted book perspective, it will give you same valuation as canfins of the world.
What I find amusing is that management has been buying almost every week since april. They could have easily deferred their buying till the DLF-Pramericaannouncement and saved themselves some money. In this kind of macro environment, stock was going to tank onacquisitionnews.
Insurance buy itself seems interesting. In HFC side, they have long term assets and short term liabilities. Insurance gives them long term liabilities and shorter term assets. If they can execute, it can lower lower their cost of capital and jack uptheirroa.
I was looking at some numbers from irda. So far Pramerica has been one of the also rans. Not much scale either. Only Max has been able to execute ( iām ignoring the PSUs). Though kapil said they wonāt be infusing much in the insurance business but i donāt see them geting anywherewithoutcapital injection. Insurance bill will get passed in winter session. Then pramerica can inject more capital (upto 49%) wihtout DHFL putting up more money. Pramerica wanted to infuse capital for quitesometimebut so far dlf had resisted (and fii limit was 26% stake).
rating upgrade will take some time.
after sep 18, if market tanks better price will be available.
do you have any views on short term numbers (post insurance buy) ?
I have a general bias against government owned and operated companies, as i feel that the managers are not incentivized to performā¦ and since controls in a government run setup are generally weak, there is a huge risk of direct conflict between management and shareholder in the absence of a promoterā¦ as a consequence I do not invest in such companies.
I could not find any large contingent liabilities, and as explained in earlier post, I dont look at cos such as canfin.
The Pramerica deal is intriguing at best (the obvious reason being, no one really knows what they paid for it!!). While it does theoretically reduces the asset-liab mismatch, I donāt think current IRDA regulations allow full concentration in one investment. Also DHFL has no experience in selling such a product and profitability in life insurance biz is a very very long term goal at best. Honestly DHFL is not a HDFC or an ICICI to have bandwidth for life insurance. It is both capital and management intensive. The worst outcome is for Kapil to be distracted and become an also ran in insurance while neglecting the golden egg laying goose in DHFL.
It is possible that insurance bill is passed, 49% is allowed, Pramerica invests into this business at a huge premium etc etcā¦ but an investor wouldnāt have invested in DHFL to punt of any of these and would have preferred if Kapil also did not use DHFL to do the same. However, since this is the only platform he owns, everything get channelled through DHFL, which in my opinion has a huge -ve bearing on the stock price.
Just wanted to cross check if anyone having access to websites with historical p/b has info on the lowest trailing p/b DHFL has traded over last 10 yrs ? ā¦ Also help share such a site please.
Thanks Excel for the info and your point on the deal. Time will tell if Kapil has got it right with the buy. Ive not invested , but simply on cash flows discounted for the core business its looking good.
Hi Vinod, I went through all your work here and saw that you switched to Canfin Homes, would you consider it again now after Rakesh Junjunwala buying about 4.5%? It looks still undervalued considering they are targeting a loan book of 75K crores by 2015.
DHFL has filed a disclosure of credit rating upgrade of the company by CARE ratings.
Long term bank facilities,NCD,FD : Upgraded to AAA from AA+.
Subordinated debt to AA+ form AA
Perpetual debt to AA from AA-
I am wondering how much saving in borrowing cost will it lead to (10-25 bps?) ? Can some finance expert here (Vinod MS, others?) explain how these rating upgrades work?
Anup gradationin rating will definitely help the company in tapping the NCD market more and lead to saving on the borrowing costs. Usually the spread between a AA+ and AAA rated bond of a company is 20 - 30 bps. However, there are lot of other factors like a bond of a AAA rated PSU like PFC, REC, IOC etc will be issued at lower yield compared to other private companies, reputation of the company (Tata Sons can borrow at a lower yield compared to other companies) and markets view about the whole sector which play an important role in determining the yield.
(DHFL invested only INR 1 and in the first quarter of operations, i.e. Quarter ending March 2014, DHFL Pramerica Life Insurance has achieved the break even level.
Also it statesā¦It is a 74:26 JV between DHFL and Prudential Financial.)
So my doubt is after the acquisition amount, DHFL has just invested 1 Rs in DHFL Pramerica Life Insurance?
Also is it not obligatory for DHFL to reveal the acquisition price for the insurance stakeā¦
At the time of acquisition the assets were valued at Rs 600 crore and the liabilities were also Rs 600 crore so the actual cost of acquisition was Rs 1 + Rs 600 crore liabilities.
DHFL raised $130 million (~810 crore) at 478/- per share via QIP.
FY15 Book value after taking into account approx. Q4 PAT, QIP and equity dilution will be around 345/-.
Capital adequacy is now over 20% . Chairman Kapil Wadhwan says QIP will ensure in 20% CAGR for next 2 years. The stock has been consolidating between bet. 450-480/-.
Jp morgan, Goldman sach, rakesh jhunjhunwala invested, Motilal Oswal had a target of 720+ last year (even before the QIP) iirc.
Crisil rating improved, This should help in getting cheaper funds from bond market.
I wonder why this stock is not going upā¦It is quoting of PE less than 10ā¦ growth for next 2 years is 20% plus without diluting equity. they have a insurance arm which has turned profitable and they are prevalent in small ticket loans which has huge traction in futureā¦
I am surprised as well on lack of movement. Given the beating, the lead of the pack, Gruh took( thanks to higher provisioning), even the news of merging other minor ones like Aadhar housing has become a no news. I am hoping for better days ahead and people will see value, like it happened with can fin.
Kapil Wadhwan, CM & MD along with colleagues add the call:Highlights by Capital Mkt:
Housing For All by 2020 was a major policy announcement, which has potential to develop 60 million housing units, benefiting the housing finance sector and the company.About 70% of the company are in the Lower Middle and Middle (LMI) segment, which would largely benefit from Housing For All scheme.
Despite a challenging year, the company has exhibited excellent performance in FY2015.
The company received the rating upgrade as well as completed the QIP issue of US$ 130 million in FY2015. The company also raised US$ 175 million of External Commercial Borrowings (ECBs) in FY2015.As per the company, the rating upgrade helped to reduce the cost of funds to 10.28% in FY15 from 10.59% in FY14.As per the company, the cost of borrowing may decline by 25 bps if the banks reduces base rates after further rates cuts from RBI.
The company continues to look at expanding the sources of borrowing. The capital markets borrowing share in total borrowings jumped to 28% in FY15 from 20% in FY14. On the contrary, the bank borrowing share dipped to 58% in FY15 from 68% in FY14.The company is looking at reducing cost of borrowing by shifting borrowing mix from Banks to Capital Markets. The company plans to reduce the share of bank borrowing to 45% over next three years.Disbursement touched Rs 20000 crore in FY2015.The company has added 105 branches in FY15.
The SME loan book of the company was marginal at Rs 375 crore, but the yields are higher at around 14% contributing to the overall margins of the company.The securitization income stood at Rs 17 crore for FY2015.The company makes yield of 1-1.5% on portfolio sell down and additional 50 bps on securitization.
GNPA of the company stood at 0.84% at end March 2015, while the NNPA was nil due to strong provisions.Credit cost is expected to be in the range of 15-20 bps for next two years.
With the past investments contributing to the revenues, the company expects to reduce the expense ratio to 24% in next two-three years from current 27.3% in FY2015.The company expects to achieve loan book growth of 20-22% in FY2016. Further, it expects PAT growth in the range of 18-20% FY2016.
The normal tax rate for the company (housing finance company) stands at 28% after tax discount of 20%. However, the tax rate came in higher at 34% for FY2015, as the company was asked to create a deferred tax assets equivalent to tax discount i.e. 6% of PBT.Company expects to improve ROE to 20% in next three years.The company expects to maintain NIMs in the range of 2.9-3%, going forward.
The company is planning to enter asset management business and is awaiting the approval from concerned authorities.
The company has also applied for small finance bank with the Reserve Bank of India (RBI). The small finance, if provided, would facilitate access to the deposits and RBI liquidity window.
It seems a big chunk of this missing Rs 250 cr is premium on redemption of Zero Coupon Debentures (although we need to wait for the FY15 AR for the specific details).
In fact there was a similar difference of about Rs 75 cr for FY14 due to the following two items (refer to pages 94 & 95 of FY14 AR):
Amortization of Capital Reserve: Rs 42 cr;
Premium on Redemption of Zero Coupon Debentures: Rs 35 cr.
I suspect the second item is a much bigger figure for FY15. If so, both the EPS Growth and the Low P/E for this Company are optical illusions.
