CRISIL Research assigns fundamental grade 4/5 to Dewan Housing Finance Corporation Ltd

 | March 16,2012 04:31 pm IST

CRISIL Research has assigned a CRISIL IER fundamental grade of 4/5 (pronounced four on five) to Dewan Housing Finance Corporation Ltd (Dewan Housing). The grade indicates that the companys fundamentals are superior relative to other listed equity securities in India.

CRISIL Research has assigned a valuation grade of 5/5, indicating that market price has strong upside from the current levels. Our one-year fair value of the stock.

is Rs 354 per share. The stock is currently trading at Rs 245 per share. The grades are not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instruments future market price or its suitability for a particular investor. The assigned fundamental grade takes into account the better-than-industry growth of Dewan Housings (Indias third largest housing finance company) consolidated loan book. Supported by organic growth and acquisitions, its loan book has grown at 52% CAGR over the past five years (Rs 252 bn as of December 2011; ~7% share of the domestic HFC market) against the industrys 16% CAGR. Dewan Housing, with its strong understanding of the mortgage market and supportive in-house systems and processes, is well positioned to tap the highly underpenetrated mortgage market.


The ratio of home loans to gross domestic product in India is a meagre 9% vs. more than 80% in developed countries like the US and the UK. The grade also factors in Dewan Housings presence across the housing finance spectrum: (i) the affluent segment via the acquisition of First Blue Home Finance (67.5% stake) in FY11 and (ii) the low income segment through Aadhar Housing Finance Pvt Ltd (50% self; 30% DHFL Vysya Housing Finance, 20% International Finance Corporation. Further, a strong collection and recovery network has helped it maintain strong asset quality (gross NPA at only 0.89% as of 9MFY12). The diversified profile of its customers, low ticket size and low loan-to-cost ratio of 67% as of 9MFY12 support the grade.


The grade is constrained by the stiff competition faced by Dewan Housing in its key operating areas (Tier II and Tier III cities) from public sector banks, which have better cost of funds due to access to current account and savings account (CASA) deposits. Also, banks and housing finance companies are getting increasingly aggressive in Dewan Housings key operating areas given the faster growth opportunities in the same. However, Dewan Housings superior turnaround processes give it a competitive edge. The grade is also tempered by the regional concentration of the loan book; western and southern India contributed 78% to loan book as of Q3FY12.


Financial outlook CRISIL Research expects total operating income to grow at a CAGR of 26% to Rs 14 bn in FY14 largely driven by loan book growth. CRISIL Research expects the loan book to grow at a three year CAGR of 28% to Rs 422 bn in FY14 on account of an underpenetrated mortgage market and increasing reach. We expect net interest margins to hover at 2.6-2.8% during the same period and gross NPAs at around 1%. RoE is expected to decline to 19.3% in FY12 due to equity infusion through QIP of Rs 3,040 mn at Rs 255.50 per share. Adjusted book value is expected to increase to Rs 253 per share in FY14 from Rs 138 per share in FY11 Valuation CRISIL Research has used the price-to-book (P/B) method to value Dewan Housing. We have assigned a P/B multiple of 1.4x to FY14 adjusted book value to arrive at a fair value of Rs 354 per share.


About the company National Housing Bank (NHB)-registered Dewan Housing offers home loans of average ticket size of Rs 0.7 mn to low and middle income segments in Tier II and III cities. Promoted by Wadhawan Group in 1984, it is the third largest housing finance company in India with a consolidated loan book of Rs 252 bn as on December 31, 2011 after HDFC Ltd and LIC Housing Ltd. Almost 94% of its total lending is to individuals (retail). As of Q3FY12, Dewan Housing is present in 437 locations across India via branches, subsidiaries and alliances with public sector banks.