buy - hdfcsec.com housing finance - ic - hdf… · the share of the non -home loan segment has...

INITIATING COVERAGE 30 OCT 2017

Dewan Housing Finance Corp. BUY

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

Galloping ahead Dewan Housing (DHFL) is the fourth-largest housing finance company in the country, with an AUM of Rs 941bn as on 2QFY18. It provides home loans mainly in the peripheries of metros and Tier II/Tier III cities, targetting both the salaried and self-employed sections. Low up-country mortgage penetration, government’s impetus for ‘Housing for All’ and incentives for affordable housing bode well for the company.

Recent initiatives to strengthen management team and internal processes have resulted in encouraging outcomes. Disbursements grew 42% in 1HFY18 Vs 18.1% in FY17. We expect C/I to improve 300+bps to 24.8% by FY20E, as internal efficiencies ride business growth.

We expect a 19.8% CAGR rise in AUMs over FY17-20E. An improving credit rating (AAA/CARE, A1+/ICRA), and a rising share of wholesale debt in the borrowing mix will help maintain NIMs, despite rising competition. The share of the Non-home loan segment has increased to ~35%, and this is expected to continue. RoA/RoE should touch 1.39/15.8% respectively by FY20.

Despite a ~45% run-up in the last six months, DHFL trades at 2.1x FY19E ABV, much cheaper than peers. Initiate coverage with a BUY. Our TP is Rs 685/sh (2.25x Sept-19E ABV).

Huge opportunity: At 9%, India’s mortgage penetration is low, with Tier II and III cities witnessing even lower levels. This offers DHFL huge growth

opportunities, especially in the affordable housing segment.

Strong presence in low-ticket size: DHFL has a strong presence in Tier II/Tier III cities. It has a pan India geographical presence, with the western region contributing ~40% to disbursements. Given its focus on low-ticket size loans, we believe DHFL would benefit greatly from the affordable housing push by the government and low penetration levels.

Improving COF: DHFL has reduced its borrowing cost, owing to improved rating and a higher share of funds from the wholesale market. This has strengthened its competitive positioning.

Strengthening of management team: Over the last few quarters, DHFL has roped in professionals with strong functional experience to lead key roles. This, along with the new ERP system, is expected to lead to higher operational efficiency and profitability.

Asset quality: Over the last few years, DHFL’s GNPA has ranged from 0.8-0.95%. We expect the company to maintain its asset quality at current levels.

FINANCIAL SUMMARY (Rs Mn) FY16 FY17 FY18E FY19E FY20E NII 15,435 18,629 22,964 28,758 33,413 PPOP 11,546 15,057 18,916 23,892 27,854 Adjusted PAT 6,066 8,124 10,752 13,668 15,918 Adj. EPS (Rs) 20.8 25.9 34.3 43.6 50.8 ROAE (%) 12.6 12.5 12.9 15.0 15.8 ROAA (%) 1.08 1.21 1.33 1.40 1.39 Adj. BVPS (Rs) 160 242 262 288 320 P/ABV (x) 3.8 2.5 2.3 2.1 1.9 P/E (x) 29.3 23.5 17.8 14.0 12.0 Source: Bank, HDFC sec Inst Research

INDUSTRY HFCs CMP (as on 27 Oct 2017) Rs 610 Target Price Rs 685 Nifty 10,323

Sensex 33,157

KEY STOCK DATA

Bloomberg DEWH IN

No. of Shares (mn) 314

MCap (Rs bn) / ($ mn) 192/2,949

6m avg traded value (Rs mn) 2,171

STOCK PERFORMANCE (%)

52 Week high / low Rs 651/214

3M 6M 12M

Absolute (%) 36.0 44.6 88.5

Relative (%) 33.6 34.2 69.7

SHAREHOLDING PATTERN (%)

Promoters 39.2

FIs & Local MFs 12.2

FPIs 23.8

Public & Others 24.8 Source : BSE

Vishal Rampuria vishal.rampuria@hdfcsec.com +91-22-6171-7325 Amey Chheda amey.chheda@hdfcsec.com +91-22-6639-2478

DEWAN HOUSING : INITIATING COVERAGE

Page | 2

Strong presence in Tier II and Tier III cities DHFL is the fourth-largest housing finance company,

with an AUM of Rs 941bn as on 2QFY18. It offers home loans mainly in the peripheries of metros, and Tier II/Tier III cities. The company targets both the salaried and self-employed segments. DHFL’s presence is spread across all regions, though the West contributed 40% to its disbursements. It has an impeccable record of an AUM growth of 23.3% CAGR over the last four years, with stable asset quality and good return ratios.

Tier II and III cities face lesser competition as compared to markets in Tier I cities. PSU banks have a strong presence here, but customer service is poor.

Given its strong understanding of the mortgage business and lucrative spreads, it has increased the share of the LAP and project finance (largely residential projects) book over the last three years, and currently hovers at ~35%

The borrower mix is almost equally split between the salaried and non-salaried segments. Increasing the share of the project book helps the company source more home loans from these projects, along with higher spreads

At the industry level, the share of housing finance companies in the mortgage loan segment has increased as compared to banks, owing to a focussed approach and better customer service. Currently, HFC has a 40% share in the housing market.

With housing growth slowing down in the Top 10 cities, and affordability becoming a challenge, growth is expected to be higher in Tier II/III cities, where DHFL has a strong presence. Over the last five years, it has expanded its branch network from 226 in FY12 to 345 in FY17.

Given the company’s focus on smaller cities and towns, the average ticket size is smaller, with a larger play on volumes. For e.g., the average ticket size for DHFL/LICHF/HDFC is Rs1.8/2.2/2.56mn respectively

With mortgage loans at ~9% of GDP, the home loan market in India is underpenetrated. An increasing per capita income and nuclearisation of families have led to the mortgage market expanding at a CAGR of 18% over the last five years. Going forward, the outlook continues to be good.

The government is targetting ‘Housing for All’ by FY22. This would provide further impetus for mortgage loans.

DHFL is the fourth largest Housing Finance company with an AUM of Rs 941bn Borrower mix is almost equally split between salaried and non-salaried segments

Page | 3

AUM Growth Disbursement Grew Strongly During 1HFY18

Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research

AUM Is Concentrated In Western Market Share Of Self-Employed Has Increased

West54%

North24%

South20%

East2%

200,000

400,000

600,000

800,000

1,000,000

Loan book (Rs.Mn) YoY growth % - RHS

0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%

50,000

100,000

150,000

200,000

250,000

300,000

Disbursement (Rs. Mn) YoY growth - RHS

29 24 27 34 3949

71 76 73 66 6151

0102030405060708090

Self-employed Non-self employed

AUM has grown at a CAGR of 23.3% during the last four years Despite expanding to other regions, West India’s domination will continue Share of non-salaried has increased, owing to increasing exposure to Non-h loan products

Page | 4

Product Snapshot Share Of LAP/SME Has Increased To ~21.1%

Product Yield LTV Tenure

Avg Ticket Size Rs

Mn Home Loan 8.35-11% 60-80% Upto 20 yrs 1.8 LAP 9.5%-13% 40-50% Upto 15 yrs 4 Construction Finance 13-15% 40-50% 5-7 yrs 600

SME 13-15% 5-7 yrs 8-9 Source : Company, HDFC sec Inst Research

Source : Company, HDFC sec Inst Research

Branch Network Increased 50%+ In The Last 5 years Mortgage Loans As A % Of GDP Is Low For India

Share of LAP and Project Loans have increased over a period of time, which fetches higher spreads Expansion of branch network has helped in better reach and growth Despite growth over the last decade, mortgage penetration is low

18% 20%

32%36%

Mortgage Loan as a % of GDP

0%10%20%30%40%50%60%70%80%90%

Home loans LAP Project loans SME

290 293

357346 345

Page | 5

Advantage affordable housing Huge housing shortage: According to a KPMG report,

India currently has a shortage of ~60mn housing units. This is expected to rise to 111mn units by FY22. Urban housing is expected to account for ~85 to 90% of the total requirement, as people migrate to urban areas. Affordable urban housing is expected to constitute ~70% of the total requirement for urban housing. Further, of the total requirement of 111mn units, nine states (Uttar Pradesh, Bihar, Maharashtra, West Bengal, Madhya Pradesh, Andhra Pradesh – including Telangana, Rajasthan, Tamil Nadu, and Karnataka) will be contributing ~ 70%.

Housing Shortage Particulars (mn units) Urban Rural Total Current housing shortage 19 40 59 Required housing by 2022 26-29 23-25 49-54 Total need 44-48 63-65 107-113 Source: KPMG, HDFC sec Inst Research

Govt’s focus on affordable housing: Apart from the huge requirement for housing, the government too has taken initiatives (on both demand and supply sides) to provide a fillip to the affordable housing sector. To fuel demand, the government has taken the following steps i.e. (1) Credit-linked subsidy -

interest rebates, and (2) Subsidy for individual construction. On the supply side, the government has provided impetus by (1) In situ –providing land for slum redevelopment, (2) Public-private partnerships for affordable housing projects, and (3) Incentives for construction of affordable housing projects.

Pradhan Mantri Awas Yojana (PMAY): The ‘Housing for All (Urban)’ mission for urban areas is being implemented during 2015-2022. This mission intends to provide central assistance for providing housing for all eligible families/ beneficiaries who don’t own a brick and mortar house. The government has an ambitious target of building 20mn homes in India, with loan disbursements of Rs 1.3tn over the next three years.

The net present value (NPV) of the interest subsidy will be credited to the loan account of the borrower.

During FY17, Rs 3.8bn of the subsidy was disbursed. With the scheme for MIG in place and a supply boost, it is expected to further increase demand. For FY18, govt. has budgeted Rs 14bn for the subsidy scheme.

Subsidies Under PMAY Category Income level Size of the House Remarks EWS Household income < Rs 0.3 mn Up to 30 sq.m Interest subsidy of 6.5 % for a tenure of 20 years or during tenure

of the loan, whichever is lower, for loans up to Rs 0.6mn. LIG Household income of Rs 0.3 to Rs 0.6 mn Up to 60 sq.m

MIG I Household income of Rs 0.6 to Rs 0.12 mn Up to 90 sq.m Interest subsidy of 4% for a tenure of 20 years or during tenure of

the loan, whichever is lower for loans up to Rs 0.9 mn.

MIG II Household income of Rs 1.2 to Rs 1.8 mn Up to 110 sq.m Interest subsidy of 3% for a tenure of 20 years or during the

tenure of the loan, whichever is lower for loans up to Rs 1.2 mn. Source: NHB

Affordable Housing push has been facing supply-related challenges, which received some remedial measures in the recent Central Budget. This would address the supply-side constraints over the medium term

Page | 6

Changes in Central Budget 2017 have boosted the affordable housing sector -

Allocation of PMAY-Urban has increased from Rs 49.4bn to Rs 60.4bn

Refinancing target for NHB increased 15% to Rs 200bn

Infrastructure status for affordable housing and indirect tax waiver. GST is not applicable to affordable housing projects. These incentives are expected to substantially increase the supply of affordable housing projects by private builders.

‘Unit size’ definition for EWS and LIG was changed to carpet area to increase unit size for end-users

Status Of PMAY (U)

Source: MOUD

Central govt. has given strong fillip to the affordable housing segment, with a slew of changes

Page | 7

Top 10 States With Housing Projects Sanctioned Under PMAY(U)

State No of Affordable Houses Sanctioned

Total Investment Approved (Rs.Bn)

Central Assistance Approved (Rs.Bn)

Andhra Pradesh 541,300 310.6 81.4 Tamil Nadu 335,039 119.9 50.9 Madhya Pradesh 287,101 195.0 44.2 Karnataka 203,260 92.8 33.5 Gujarat 172,816 115.0 24.9 West Bengal 144,904 59.2 21.9 Maharashtra 144,165 158.7 22.4 Uttar Pradesh 120,028 47.7 19.6 Jharkhand 95,742 35.6 14.7 Bihar 88,375 39.2 14.5 Source: MOUD

Top 10 states account for 80% of the sanctions

Page | 8

Comparison With Large-Sized HFCsDHFL Is The Fourth Largest Avg. Ticket Size

Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research Product Mix Comparison NIMs Are Lower

Amongst large HFCs, average ticket size for DHFL is low Most HFCs have now a sizeable portion of the Non-Home mix, which is critical to generate spreads and return ratios

DHFL HDFC LICHF PNB HF

448 56

9 695 83

5 2,25

3 2,91

5 3,38

778 91

3 1,08

168 276 41

FY13 FY14 FY15 FY16 FY17

DHFL HDFC LICHF PNB HFAUM (Rs bn)

72% 66% 67% 67%86% 84%

61% 59%

28% 34% 33% 33%14% 16%

39% 41%

2016 2017 2016 2017 2016 2017 2016 2017

DHFL HDFC LIC HF PNB HF

Home loans Non-Home loans

2.5 2.

2.4 2.

3.7 3.

9 4.0 4.

0.00.51.01.52.02.53.03.54.04.55.0

DHFL LICHF HDFC PNB HF%

Page | 9

C/I Comparison Gross NPA On Loan Book Is Higher Owing To Exposure To Middle-To-Low Income Groups

ROA Is A Tad Lower Owing To Higher COF ROE Comparison

DHFL’s GNPA is relatively high, owing to exposure to middle-to-low income groups where delinquencies are higher ROE is lower owing to lower NIMs and higher C/I

31.933.1

35.632.2

7.4 7.7 7.4 6.6 6.8

16.3 14.5 15.2 14.7 15.9

30.128.3

DHFL HDFC LICHF PNB HF%

0.70.8

0.80.9 0.9

0.60.7

0.5 0.4

0.70.7 0.7 0.7

0.2 0.2 0.2

1.33 0.94 1.08

2.48 2.59 2.65 2.60 2.47

1.41 1.49

1.37 1.37

1.48 1.43 1.47 1.53

DHFL HDFC LICHF PNB HF%

13.6 14.9

18.8 18.119.6 19.1

20.621.6 21.8

16.117.1 14.9

Page | 10

Increased competition in the Home Loan segment Competition in the home loan business has increased,

as banks are focussing on Retail loans, given lower loan demand from corporates. This, along with weak market conditions, has resulted in HFC growth rate

falling to 18% in FY17 from 21% in FY15. We continue to expect high competition in the home loan business, owing to strong asset quality, despite lower yields.

Banks Giving Tough Competition to HFCs Non-home Loan Growing Faster for HFCs

Source : Industry Sources, HDFC sec Inst Research Source : Industry Sources, HDFC sec Inst Research

Declining Spreads On The Mortgage Product Owing to Competition

Growth rate for banks in the mortgage segment improved, as they started focussing owing to sluggish corporate loan demand Mortgage Spreads with respective to G-Sec has shown a downward trend in last few quarters owing to increasing competition

8.6 8.77.8 7.5 7.6 7.0 6.7 6.8

10.0 10.0 9.3 9.4 9.5 9.18.4 8.4

1.4 1.3 1.5 1.9 1.8 2.1 1.7 1.5

10-year G-Sec yield (%) SBI Home Loan rate (%)Spreads (%)

1518 17 18

20 2119 18 20

FY13 FY14 FY15 FY16 FY17 Jun-17

Banks HFC'sBanks Growth (%) - RHS HFC's Growth (%) - RHS

19 21 19 1819

26 26 27 29

22 21 20 22

FY14 FY15 FY16 FY17 Jun-17

Home loan Growth (%) Other loans Growth (%)Overall Portfolio (%)

Page | 11

Gross NPAs stable DHFL has stable GNPAs at 0.94%. Asset quality has

remained stable, despite a higher share of the Non-home loan book.

Asset quality is supported by the in-house sourcing of loans, supported by healthy operational and

underwriting processes. Valuation report is provided by approved vendors, which results in better control.

On the non-housing side, GNPAs are largely stable, though NPAs are high in the commercial segment.

GNPA Trend NNPA

Source: Company, HDFC sec Inst Research

Asset quality has been stable for DHFL

0.95 0.93 0.940.90 0.88

1.43 1.411.33 1.31 1.29

FY15 FY16 FY17 FY18E FY19E FY20E

GNPA (%) 2 yrs Lagged %

0.540.50

FY14 FY15 FY16 FY17 FY18E FY19E FY20E

NNPA (%)

Page | 12

Disbursement growth accelerates DHFL has undertaken many process-level changes, along with sales workforce target area realignment, which have resulted in improved productivity and faster turnaround time. The growth momentum in the last two quarters is visible. Despite a sluggish growth demand environment, disbursement has grown by 42% during 1HFY18. Within the segments, LAP has grown 249% YoY/38% QOQ owing to strong demand for accounted money owing to GST from small traders and manufacturers.

DHFL has made the following operational changes:

Back office operations have been moved to centralised offices in Mumbai and Hyderabad. This will help in better underwriting and resource planning, and improved productivity.

Implementing end-to-end ERP system which will replace the current Legacy system, which is not efficient.

Working on providing mobility systems encompassing the entire loan cycle, from log-in to disbursement to collection.

Focussing on approved projects which will help in faster turnaround and approval timelines.

Disbursement Mix

Source: Company, HDFC sec Inst Research

Growth driven by improving internal processes Bulk of the growth has come from the LAP book, owing to higher demand from SMEs to meet their need for accounted money due to GST

0102030405060708090

Home Loans LAP Project Finance SME

Page | 13

Non-home loan book helps maintain spreads During the last two to three years, DHFL is focussing

on financing residential projects, with a view to source loans from them. According to management, it largely provides loans to projects where all approvals are in place. It has put in a strong process like underwriting by its own team, projects in those cities where it has a branch for monitoring purposes, and waterfall payout structure (repayment linked with sales). DHFL tries to be the sole financier, and aligns its interest rates based on the percentage of home loans generated from these projects. This helps in making the company the preferred partner of the developer. Now, with implementation of the RERA, the company is now focussing on this segment independently for cross-selling opportunities, as the project risk has come down substantially owing to tighter rules and improved transparency

In the non-housing segment, it continues to focus on the LAP book, which provides 200-300bps higher rate as compared to home loans. In FY17, the LAP segment grew by 29%, and contributed 16.9% to the AUM. DHFL also has a small portfolio of SME loans

DHFL maintains high liquidity, equivalent of three to six months of net outflow requirement to isolate itself from any liquidity volatility in the market. This has been a drag on overall spreads. However recently, DHFL, as a part of treasury strategy, has put in a dynamic process to access its short-term liquidity requirement. This strategic cash reserve would be maintained at a portfolio level in tax-efficient instruments. Management believes that this is expected to reduce some negative carry.

Asset Mix Change Towards Higher Non-home Loan Book

NIM Trend

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Non-Home loan product share has gone up n the last 4 years; mgt has guided this to remain in the current range Non-Home loan segment grew 48% in FY17

0%10%20%30%40%50%60%70%80%90%

Home Loan LAP Construction Finance SME/Others

2.5 2.5

2.7 2.8

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0

Page | 14

Move towards wholesale market to lower borrowing cost

Given the consistent increase in the scale of AUMs and stable asset quality, Dewan Housing now enjoys a strong credit rating. While the company has an outstanding AAA rating from CARE, other agencies have given a short-term rating of A1+. Further, Dewan Housing has been consistently reducing its dependence on bank borrowings, and is tilting towards the wholesale market for borrowings-NCDs, CP, public deposits etc. The share of bank borrowings is now at 43%, while that of the wholesale debt market stands at 40%. The remaining comes in from

FDs, NHB refinancing and ECBs. Strong performance and a vibrant bond market have helped it to increase the share of the debt market to 40%, and this is expected to increase further. Also, falling bank borrowing rates and greater contributions from other sources are expected to further lower the blended borrowing costs of the company.

Recently, RBI relaxed the sectoral cap on debt mutual funds’ exposure to HFCs from 10% to 15%. This would further increase the fund pool available to HFCs, and lead to lower costs of borrowing.

Bank Borrowing Is Below 50% Cost Of Borrowing Is Falling

DHFL’s bank borrowings’ contribution has dropped from 61% in FY15 to 42% in FY17. RBI’s relaxation on sectoral cap for HFCs has increased funds’ availability for the sector by ~Rs 500bn.

0%10%20%30%40%50%60%70%80%90%

Banks NCD/DCM FD ECB NHB

10.510.2

9.58.9 8.7

FY15 FY16 FY17 FY18E FY19E FY20E

Page | 15

Insurance investment monetisation

DHFL has closed a deal with the promoter entity, wherein it has sold 50% of its stake in DHFL Pramerica for Rs 20bn. The investment had a book value of Rs 310mn, resulting in a profit of Rs 19.7bn. DHFL purchased this in FY15. With this, the company has monetised this investment as a part of its strategy to garner capital to grow the core business of lending. The transaction has boosted its net worth by 33% to Rs 80bn.

Transaction summary: The stake in DHFL Pramerica Life Insurance was transferred to a 100%-owned subsidiary for Rs 20bn. The subsidiary has issued a 100-month CCDs to the promoter’s entity WGC, worth Rs 19bn. The WGC holding has pledged these

CCDs, and borrowed from institutions to fund the transaction. WGC has a put option to sell these CCDs to DHFL, in case of inability to service the loan. Accordingly to management, this was one of the pre-conditions for approval by IRDA, as default on CCDs can lead to a change in ownership.

The Wadhawan Group is emerging as a financial conglomerate with an interest in HFC, Insurance, asset management etc. As DHFL owns a stake in emerging entities/ventures like Aadhar, Avanse, DHFL Pramerica AMC etc, we expect it to monetise its investment over a period of time, which will unlock value for shareholders.

Other Strategic Investment In Group Companies

Source : Company

The book value of the Insurance venture investment was merely Rs 310mn The transaction was based on a valuation report from Wilson, a renowned global firm

9.47% 12.37% 36.78% 50%

DHFL Vysya HFC

AUM Rs 20.67bn

Aadhar HFCAUM

39.62bn

Avanse Education

LoansAUM Rs 14.07bn

DHFL Pramerica

Asset Managers

AUM Rs 276.71bn

Dewan Housing Finance (DHFL)

Page | 16

Management team enhanced DHFL has an experienced management team. The

team is lead by Kapil Wadhawan, Chairman & Managing Director (Promoter). Based on interactions, we believe management has a good understanding of the housing market. Over the last few quarters, DHFL has enhanced its management team for the next level of growth. It has recruited senior level professionals

from the industry. These professionals have strong domain expertise in their respective fields, and are expected to drive operational, lead sourcing and technology changes, which would help in improving efficiency and lower costs. A brief profile is given below:

Key Positions Occupied By Professionals Name Designation Background

Harshil Mehta Joint MD & CEO

Mehta’s 25 years of leadership experience spans diverse financial service functions including credit appraisal, operations and service quality. He is an M.Sc. from Mumbai University, and a MBA (Finance) from Graduate School of Business, Mississippi State University, USA. He is with the group since 2011, and was recently elevated as Joint MD.

Santosh Nair Chief Business Officer

Santosh Nair brings with him over two decades of experience in the banking Industry, with expertise in sales and distribution, operations and manpower management. Prior to joining DHFL, Nair served as Executive Vice President, Business Head Home Loans and Unsecured Loans with HDFC Bank. He joined the company in May 2017.

Vivek Kannan Chief Operating Officer

Vivek comes with nearly two decades of multifaceted experience in Financial Services, Collections, Operational Strategy, Greenfield Operations and Process Reengineering, and is a certified black belt in Six Sigma. Prior to joining DHFL, Kannan was associated with Citi Bank for over seven years, as Director – Credit Operations, India

Bharat Pareek Head of Treasury

Pareek comes with about 15 years of multifaceted experience in investment and portfolio domain with expertise in Treasury, Working Capital and Funds Management. Prior to joining DHFL, Pareek was associated with Reliance Industries Limited, as Vice President, Treasury.

Source: Company

Enhanced mgt team is expected to drive operational efficiency

Page | 17

Loan book growth at 19.8%; NIM to hover at 2.8-2.9% DHFL’s AUM has grown at a CAGR of 23.1% over the

last three years, driven by higher contribution from the non-housing book. We expect the company to sustain growth of 19.8% CAGR, driven by faster growth in the affordable segment in Tier II/III cities.

We expect growth to be balanced across segments, unlike the last three years, when the growth rate of home loans was 16% and Non-home loans was 44%. NIM is expected to be stable at the current level, driven by lower cost of funds.

AUM Growth To Sustain NIM To Be Maintained

Loan book to grow at a CAGR of 19.8% over the next 3 years We expect Home loan contribution to marginally improve from the current 65.8% to 66.1% by FY20

569 695

2.5 2.7 2.8 2.8 2.9 2.9

Page | 18

Operational efficiency to lead to improvement in cost/income ratio DHFL’s cost-to-income (C/I) ratio is high at 27.9%, as

compared to other HFCs. This is partially because of a lower-ticket size business and low productivity.

The company is implementing a new ERP system in phases over the next two years, which is expected to improve operational productivity and lead to savings in costs.

It has undertaken other changes in operations which will improve productivity, faster turnaround time and drive operational efficiency.

We build in C/I ratio improving from 27.9% to 24.8% by FY20.

Cost-To-Income To Come Down Cost Split

46% 46% 41% 41% 45%

3% 3% 5% 4% 4%

0%10%20%30%40%50%60%70%80%90%

Employee Depreciation Establishment

Employee cost forms 45% of the operation cost Majority of home loans are sourced through their own sales team. This helps in lower costs, along with better asset quality

27.927.0

25.3 24.8

Page | 19

PAT growth to sustain; ROE at 15.8% With loan book growth and an improving C/I ratio, we

expect PAT to grow faster at a CAGR of 25.1%. ROA is expected to improve to 1.39% in FY20. Similarly, ROE is expected to improve to 15.8%.

Trend In PAT ROE To Improve

Improving C/I ratio, higher leverage and monetisation of the land/building in Kalina to help generate higher ROE

Adj PAT YoY growth % - RHSRs bn

ROAA % ROE % - RHS

Page | 20

Comfortable capital position

DHFL has a strong capital base after the recent monetisation of the Insurance business. It’s CAR of 18.03% (Tier 1 at 13.39% and Tier II at 4.64%), is way above the regulatory requirement of 12%. It currently has a leverage of ~10.5x, and has headroom to increase this to 11-12x over the next three years. Given its focus on small-ticket size loans, the average risk weight for the company is 58%.

Risk Weight On Housing Loan For HFC Risk Weights Loan Value Cap Rs mn LTV Cap

35% 3 80% 50% 3-7.5 90% 75% >7.5 75%

Street concerns The Street has a few concerns about the company,

especially the promoter’s linkage with a real estate developer in Mumbai. However, the DHFL group separated many years back, and now has no business relationship. We believe DHFL has good fundamentals, and provides a strong play on mortgage lending growth

High liquidity leading to negative cost of carry

DHFL maintains higher liquidity as a part of its liquidity risk management to de-risk itself from liquidity challenges. As a policy, the company maintains three to six months of net outflow requirements. Though this acts as a buffer and can provide liquidity in case it freezes, it results in a negative carry, which impacts margins.

Capital locked in a real estate building

In 2012, DHFL invested Rs 8bn in a commercial project in Kalina. It had envisaged using the property as its head quarters, and planned to lease the remaining space to its group companies. However, the project was stalled, owing to FSI-related issues. With the FSI issue getting resolved in FY15, the company got a Rs 2.1bn refund from the developer. The building is almost ready now, with carrying value of Rs 5.5bn. According to management, they are exploring the possibilities of either leasing the entire building or selling the commercial project. We have modelled exit at the book value in FY19.

Money from Insurance stake sale has led to increase in capital NHB has also recently reduced the provisioning on standard home loan from 0.4% to 0.25%

Page | 21

Valuation and view DHFL is a play on the mortgage opportunity in Tier

II/Tier III cities. Also, it is expected to be a beneficiary of affordable housing opportunities, along with the under-penetrated demand of the self-employed category. Despite the stock surging 40% in the last six

months, it is quoting at 2.1x FY19 P/ABV multiple. We believe the stock should trade at 2.25x Sept’19 ABV. We initiate coverage with BUY rating and a TP of Rs 685/sh.

1 Yr Forward P/BV 1 Yr Forward P/E

Despite a sharp run-up, the stock has an upside 0

Page | 22

Key risks Share of the Non-home loan book is at 35%. Though

we expect the company to contain its NPAs and credit costs, inability to maintain asset quality in the Non-home loan segment is a key risk.

In case the promoter entity WGC is unable to arrange funds to repay the loans, the promoter entity has the option to sell CCDs to DHFL, who has to repay the debt borrowed against CCDs. Monetization of the Insurance business has led to a significant increase in its net worth. Any reversal of transaction can lead to significant erosion of capital.

PEER VALUATION

NBFC/HFC MCap (Rs bn)

CMP (Rs) Rating TP

(Rs) ABV (Rs) P/E (x) P/ABV (x) RoAE (%) RoAA (%)

FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E LICHF 310 614 NEU 665 247 283 324 15.3 13.6 11.8 2.48 2.17 1.89 17.1 16.7 16.8 1.27 1.25 1.25 SHTF 263 1,160 BUY 1,346 452 503 574 17.3 14.5 11.7 2.57 2.3 2.02 12.8 13.8 15.1 1.92 2.01 2.1 DHFL 192 610 BUY 685 242 262 288 23.5 17.8 14.0 2.5 2.3 2.1 12.5 12.9 15.0 1.21 1.33 1.40 CIFC 176 1,124 BUY 1,318 268 344 409 20 15.7 13 4.2 3.26 2.75 18.7 20.2 20.5 2.59 2.76 2.78 REPCO 38 600 BUY 865 197 239 - 19.1 16 - 3.05 2.51 - 16 16.5 - 2.04 2.11 - Source : HDFC sec Inst Research

Page | 23

INCOME STATEMENT (Rs mn) FY16 FY17 FY18E FY19E FY20E Interest Earned 71,395 86,311 100,167 115,000 130,521 Interest Expended 55,959 67,683 77,203 86,241 97,108 Net Interest Income 15,435 18,629 22,964 28,758 33,413 Other Income 1,605 2,261 2,957 3,223 3,647 Total Income 17,041 20,890 25,921 31,982 37,061 Total Operating Exp 5,495 5,832 7,005 8,089 9,207 Employee Expense 2,276 2,625 3,088 3,613 4,128 PPOP 11,546 15,057 18,916 23,892 27,854 Provisions & Contingencies 1,750 2,180 2,425 2,929 3,440 PBT 9,796 12,877 16,491 20,963 24,414 Extraordinary items 19,694 Provision For Tax 3,730 4,754 5,739 7,295 8,496 Reported PAT 6,066 27,818 10,752 13,668 15,918 Adjusted PAT 6,066 8,124 10,752 13,668 15,918 Source: Company, HDFC sec Inst Research

BALANCE SHEET (Rs mn) FY16 FY17 FY18E FY19E FY20E SOURCES OF FUNDS Share capital 2,918 3,132 3,132 3,132 3,132 Reserves and surplus 47,252 76,827 83,708 92,455 102,643 Shareholders' funds 50,170 79,958 86,839 95,587 105,774 Total Borrowings 610,496 812,645 914,320 1,067,460 1,236,429 Other Liabilities, provisions 17,866 30,377 26,526 30,849 35,382 Total 678,531 922,980 1,027,686 1,193,895 1,377,585 APPLICATION OF FUNDS Advances 617,750 720,962 896,034 1,056,785 1,236,429 Investments 8,932 135,349 100,606 102,276 104,095 Fixed assets 7,805 8,427 8,595 3,267 3,365 Other Assets 44,044 58,242 22,451 31,567 33,696 Total 678,532 922,980 1,027,686 1,193,895 1,377,585 AUM 695,200 835,600 1,018,220 1,214,696 1,437,708 Source: Company, HDFC sec Inst Research

Page | 24

KEY RATIOS

FY16 FY17 FY18E FY19E FY20E VALUATION RATIOS Adj. EPS (Rs.) 20.8 25.9 34.3 43.6 50.8 Earnings Growth (%) 41.0 33.9 32.4 27.1 16.5 BVPS (Rs.) 172 255 277 305 338 Adj. BVPS (100% cover) (Rs.) 160 242 262 288 320 ROAA (%) 1.08 1.21 1.33 1.40 1.39 ROAE (%) 12.6 12.5 12.9 15.0 15.8 P/E (x) 29.3 23.5 17.8 14.0 12.0 P/ABV (x) 3.8 2.5 2.3 2.1 1.9 P/PPOP (x) 15.4 12.7 10.1 8.0 6.9 Dividend Yield (%) 0.5 0.3 0.3 0.4 0.5 PROFITABILITY Yield On Advances (%) 12.7 12.9 12.4 11.8 11.4 Cost Of Funds (%) 10.2 9.5 8.9 8.7 8.4 Spread (%) 2.5 3.4 3.4 3.1 3.0 NIM (%) 2.7 2.8 2.8 2.9 2.9 OPERATING EFFICIENCY Cost/Avg. Asset Ratio (%) 1.0 0.9 0.9 0.8 0.8 Cost-Income Ratio 32.2 27.9 27.0 25.3 24.8 BALANCE SHEET STRUCTURE RATIOS AUM Growth (%) 22.2 20.2 21.9 19.3 18.4 Borrowing Growth (%) 24.9 33.1 12.5 16.7 15.8 Equity/Assets (%) 7.4 8.7 8.4 8.0 7.7 Equity/Loans (%) 8.1 11.1 9.7 9.0 8.6 Total Capital Adequacy Ratio (CAR) 17.0 19.3 18.3 17.1 16.2

Tier I CAR 13.3 14.9 14.3 13.6 13.0

FY16 FY17 FY18E FY19E FY20E ASSET QUALITY Gross NPLs (Rs mn) 5,731 6,785 8,064 9,300 10,510 Net NPLs (Rs mn) 3,610 4,194 4,019 3,497 2,643 Gross NPLs (%) 0.93 0.94 0.90 0.88 0.85 Net NPLs (%) 0.58 0.58 0.45 0.33 0.21 Coverage Ratio (%) 37.0 38.2 50.2 62.4 74.9 Provision/Avg. Loans (%) 0.31 0.33 0.30 0.30 0.30 ROAA TREE Net Interest Income 2.74% 2.78% 2.84% 2.95% 2.91% Non Interest Income 0.28% 0.34% 0.37% 0.33% 0.32% Operating Cost 3.02% 3.12% 3.21% 3.28% 3.23% Provisions 0.97% 0.87% 0.87% 0.83% 0.80% Tax 0.40% 0.39% 0.38% 0.37% 0.36% ROAA 1.08% 1.21% 1.33% 1.40% 1.39% Leverage (x) 11.7 10.3 9.7 10.7 11.4 ROAE 12.6% 12.5% 12.9% 15.0% 15.8% Source: Company, HDFC sec Inst Research

Page | 25

RECOMMENDATION HISTORY

Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 30-Oct-17 610 BUY 685

Dewan Housing TP

Page | 26

Disclosure: We, Vishal Rampuria, CA & Amey Chheda, ACA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HSL. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report. HSL or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: complianceofficer@hdfcsec.com Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE-INB/F/E 231109431, BSE-INB/F 011109437, AMFI Reg. No. ARN: 13549, PFRDA Reg. No. POP: 04102015, IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657, SEBI Research Analyst Reg. No.: INH000002475, CIN - U67120MH2000PLC152193 Mutual Funds Investments are subject to market risk. Please read the offer and scheme related documents carefully before investing.

Page | 27

HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel, Mumbai - 400 013 Board : +91-22-6171 7330 www.hdfcsec.com

buy - hdfcsec.com housing finance - ic - hdf… · the share of the non -home loan segment has...

Documents

buy saunter down under - hdfcsec.com shasun - update -...

information technology - hdfc securities - 3qfy19...

monthly product deck - hdfcsec.com

simplex infrastructures ltd. - hdfcsec.com...

october 15-17, 2008hdf and hdf-eos workshop xii1 hdf-java...

the rise of discount brokers - hdfcsec.com - update - mar19...

hdf & hdf-eos data & support at nsidc

ipo note - hdfcsec.com

baskets review - hdfcsec.com

www.hdfgroup.org the hdf group hdf update mike folk the hdf...

neutral expensive, but beautiful - hdfcsec.com small finance...

www.hdfgroup.org the hdf group november 3-5, 2009hdf/hdf-eos...

hsl research - hdfcsec.com

nasa hdf/hdf-eos data access challenges

buy - hdfcsec.com forgings - 4qfy19 - … · buy . hdfc...

financials - hdfc securities · pranav gupta...

buy worst is now behind - hdfcsec.com - 4qfy18 - hdfc...

ipo note rolex rings limited - hdfcsec.com

9/17/2015the hdf group1 hdf update mike folk the hdf group...

sell - hdfcsec.com patil - 3qfy18 - hdfc sec... · kolte...