dewan housing finance ltd-event...

1 Dewan Housing Finance Ltd. – Event Update ACMIIL

Dewan Housing Finance Ltd

Dewan Housing Finance Corporation Ltd (DHFL), Wadhwan housing private

limited and Caledonia investments have acquired 100% in Deutsche Post bank

home finance (DPHFL) for a consideration of `10.8 billion. Post the transaction,

DHFL will hold 67.5% stake in the company.

Deutsche Post bank home finance limited (DPHFL)

Deutsche Postbank Home Finance Ltd. (DPHFL) is a National Housing Bank

(NHB) registered housing finance company. The company is a fully owned

subsidiary of Deutsche Postbank, AG, Group, which is the largest retail bank in

Germany. The company has over 32,000 customers and has 25 branches, 14 sales

office and 3 processing units across India. The home loan portfolio is `48.13 billion

as on Sep 2010.

Geographical Presence

In terms of geographical diversification, DPHFL’s portfolio is concentrated in

NCR, although concentration is declining from 46% on March 31, 2006 to 37% on

March 31, 2010. Other states for DPHFL include: Karnataka (16%), Maharashtra

(13%), Andhra Pradesh (10%) and Tamil Nadu (5%).

Loan Book

The loan book of DPHFL grew at a CAGR of 19.1% during FY08-10. Individual

home loan constitute 87% of the loan portfolio. However the non-housing portfolio

is increasing over the years and going forward, over the medium term, the company

plans to increase its high yielding non-housing loan book. The non-housing loan

book constitutes loan against properties and other loans. The yields in the non-

housing segment are 300 bps higher than those in the home loan segment. The

disbursements have grown by 26% during the same period. The average ticket size

for housing loans continued to be around `15 lacs in 2009-10. The company

intends to achieve a disbursement growth of 30% during FY11.

Borrowing profile

The funding profile of DPHFL is well diversified and includes borrowings from a

large number of banks, NCDs and NHB refinance. However banks continue to be a

dominant source of funds for the company.

7th Dec, 2010.

Key Data `̀̀̀

CMP (`) 286

Target Price (`) 344

Bloomberg Code DEWH IN

Reuters Code DWNH.BO

BSE Code 511072

NSE Code DEWANHOUS

Face Value (`) 10

Market Cap (` Bn) 30

52 Week High (`)) 347

52 Week Low (`) 178

Avg. Daily Volume (6m) 266171

Shareholding %

Promoters 41.6

Mutual Funds / Bank/ FI 2.5

Foreign Institutional Investors 33.3

Others 22.6

Total 100.0

Analyst Deepti Chauhan [email protected] Tel: +91-22 2858 3408


Asset quality

The Gross NPA% for DPHFL is at 0.77% on March 2010. The company continues

to maintain 100% provision on its Gross NPAs; as a result of which Net NPA’s are

zero. Going forward, as the company intends to increase its non-housing portfolio,

which is relatively riskier, maintaining asset quality will be a critical factor.

Net interest margins

The net interest margins for the company have been maintained at more than 3%

for the past three years. Going forward, the company intends to improve the

margins by 20-30 bps.

Fee income

The company is targeting to ramp up its financial product distribution – mainly

insurance products to drive its fee income growth. At present the company is

involved in selling life insurance linked to home loans.

Synergies for DHFL

� Access to northern regions-With strong presence in southern and western

states the acquisition gives DHFL access to northern regions as DPHFL

has ~40% of the portfolio concentration is in these regions.

� Access to individual in the higher income segment where DHFL was not

present. The average ticket size for DPHFL is around `1.5m compared

with around `0.7 mn for DHFL.

� DHFL also intends to augment its fee income by cross selling insurance

products to customers of Deutsche Postbank and thereby increasing

Deutsche Postbank’s ROE, which is low currently at 14.5%.

Funding of the deal

The consideration required to be paid by DHFL is `7.3 billion which the company

is expected to fund through tier II capital. The company has already raised `3.5

billion from Tier II placement of bonds and expects the balance also to be raised in

same form. DHFL expects the combined CAR post the deal to be in the range of

~18-20% with Tier II capital at ~8-9%.


Valuation and Recommendation

We expect DHFL to register a 42% growth in its loan book during FY10-12. In a

rising interest rate environment we expect DHFL to pass on the rise in cost of funds

to its borrowers thereby maintaining margins. With strong loan growth, we expect

net profits to register a 47.2% CAGR during FY10-12.

We have presented herewith proforma financial statements of the subsidiary

company Deutshce Postbank based on the available information and the

management expectations. However we have not consolidated the same with the

company pending clarity on the financial as well as business integration.

We believe the acquisition will be positive for DHFL in the long term as it gives

access to a new segment as well as region where the company was not present

earlier. Also the quality of the asset is superior as compared to DHFL considering

the zero NPA’s.

Given the strong performance, improving asset quality and coverage ratio, we

continue to be positive on the company. We maintain our “ACCUMULATE”

recommendation on Dewan housing Finance Ltd with a target of `344. (2.1x

P/ABV of `164 of FY12).

Dewan Housing Finance Ltd

Earnings Summary `̀̀̀ Mn

Particulars FY09 FY10 FY11E FY12E

Interest Income 6,391.1 8,709.4 13,291.5 19,290.2

Interest expended 4,929.1 6,698.4 10,125.8 14,686.1

Net Interest Income 1,462.0 2,011.0 3,165.7 4,604.1

Growth % 46.4 37.6 57.4 45.4

Other Income 544.8 1,216.1 1,512.1 2091.3

Operating Income 2,006.9 3,227.0 4,677.8 6,695.5

Operating Expenses 705.7 1,120.2 1,619.6 2,158.3

Pre Provisioning Profits 1,301.1 2,106.9 3,058.2 4,537.1

Provisions & contingencies 60.0 85.0 100.0 125.3

Profit before Taxes and Prior period items 1,241.1 2,021.9 2,958.2 4,411.8

Extraordinary item / Prior period items -54.5 0.0 354.3 0.0

Profit before Taxes 1,186.7 2,021.9 3,312.5 4,411.8

Provisions for taxes 323.5 515.0 861.3 1,147.1

Net Profits 863.2 1,506.9 2,451.3 3,264.8

Growth % 4.5 74.6 62.7 33.2

Source: Company, ACMIIL research


Sources and Application of Funds `̀̀̀ Mn


Liabilities

Capital 635.2 850.3 1,039.0 1,039.0

Reserves & Surplus 4,500.2 7,884.1 13,642.7 16,396.9

Networth 5,135.4 8,734.4 14,681.7 17,435.9

Borrowings 58,763.8 89,267.9 127,794.1 177,950.9

Deferred Tax liability 45.9 41.5 41.5 41.5

Total 63,945.1 98,043.8 142,517.3 195,428.3

Assets

Fixed assets 498.4 2,164.9 2,601.4 3,093.6

Investments 1,085.1 1,313.7 1,313.7 1,313.7

Loans 58,066.2 87,584.1 126,528.8 176,189.0

Net current Assets 4,295.4 6,981.1 12,073.4 14,832.0

Total 63,945.1 98,043.8 142,517.3 195,428.3


Key Ratios FY09 FY10 FY11E FY12E

Spreads

Cost of Borrowings 10.0% 9.0% 9.3% 9.6%

Yield on Advances 13.1% 12.2% 12.4% 12.7%

Net Interest Income 3.1% 3.2% 3.1% 3.1%

Net interest margins 3.2% 3.0% 3.0% 3.0%

Profitability ratios

Return On Average Assets (ROAA) 1.6% 1.9% 2.0% 1.9%

Return On Average Net worth (ROANW) 18.0% 21.7% 20.9% 20.3%

Balance sheet ratios

Loan to borrowings ratio (%) 98.8 98.1 99.0 99.0

Debt/Equity Ratio (Times) 11.4 10.2 8.7 10.2

Growth Ratios

Borrowings 48.0% 51.9% 43.2% 39.2%

Loans 39.6% 50.8% 44.5% 39.2%

NII Growth 25.8% 63.5% 45.0% 43.1%

Book value 15.4% 25.5% 32.7% 18.8%

EPS 4.5% 28.8% 28.4% 33.2%

Valuation ratios

EPS (`.) 14.3 18.4 23.6 31.4

Book value (`.) 75.3 98.8 137.1 163.7

P/E (X) 21.7 16.9 13.1 9.9

P/BV (X) 3.7 2.9 2.2 1.9



Deutsche Post bank home finance limited (DPHFL)-Proforma Financial Statements

Earnings Summary `̀̀̀ Mn


Interest Income 4,324.0 4,618.4 5,894.2 7,864.8

Interest expended 3,260.1 3,324.5 4,306.5 5,926.9

Net Interest Income 1,063.9 1,293.9 1,587.7 1,937.8

Growth % 31.7 21.6 22.7 22.1

Other Income 176.3 346.6 490.9 648.7

Operating Income 1,240.2 1,640.5 2,078.6 2,586.6

Operating Expenses 578.1 729.9 975.2 1,272.9

Pre Provisioning Profits 662.1 910.6 1,103.3 1,313.6

Provisions & contingencies 38.5 66.6 101.3 147.4

Profit before Taxes 623.6 844.0 1,002.0 1,166.2

Provisions for taxes 176.8 235.6 0.0 0.0

Net Profits 446.8 608.4 1,002.0 1,166.2

Growth % 71.9 36.2 280.6 326.5


Sources and Application of Funds `̀̀̀ Mn


Liabilities

Capital 2,814.3 2,814.3 2,814.3 2,814.3

Reserves & Surplus 1,154.2 1,762.6 2,484.1 3,323.7

Networth 3,968.5 4,576.9 5,298.4 6,138.0

Borrowings 36,591.2 40,507.7 53,362.6 70,385.5

Total 40,559.7 45,084.6 58,660.9 76,523.6

Assets

Fixed assets 99.3 100.8 83.1 63.2

Investments 197.6 167.3 167.3 167.3

Loans 37,444.3 43,178.6 56,289.6 73,702.1

Net current Assets 2,699.5 1,503.7 1,986.7 2,456.7

Deferred Tax asset 119.0 134.2 134.2 134.2

Total 40,559.7 45,084.6 58,660.9 76,523.6



Key Ratios FY09 FY10 FY11E FY12E

Spreads

Cost of Borrowings 10.2% 8.6% 9.2% 9.6%

Yield on Advances 12.7% 11.5% 11.9% 12.1%

Net Interest Income 2.6% 2.8% 2.7% 2.5%

Net interest margins 3.1% 3.2% 3.2% 3.0%

Profitability ratios

Return On Average Assets (ROAA) 1.2% 1.4% 1.4% 1.2%

Return On Average Net worth (ROANW) 11.9% 14.2% 14.6% 14.7%

Balance sheet ratios

Loan to borrowings ratio (%) 102.3 106.6 105.5 104.7

Debt/Equity Ratio (Times) 9.2 8.9 10.1 11.5

Growth Ratios

Borrowings 33.4% 10.7% 31.7% 31.9%

Loans 23.4% 15.3% 30.4% 30.9%

NII Growth 33.1% 34.3% 26.1% 24.2%

Book value -8.7% 15.3% 15.8% 15.8%

EPS 39.3% 36.2% 18.6% 16.4%

Valuation ratios

EPS (`.) 1.6 2.2 2.6 3.0

Book value (`.) 14.1 16.3 18.8 21.8



Notes

Institutional Sales:

Ravindra Nath, Tel: +91 22 2858 3400

Kirti Bagri, Tel: +91 22 2858 3731

Himanshu Varia, Tel: +91 22 2858 3732

Email: [email protected]

Institutional Dealing:

Email: [email protected]

Disclaimer:

This document has been prepared by the Research Desk of Asit C Mehta Investment Interrmediates Ltd. and is meant for use of the recipient only and is not for

circulation. This document is not to be reported or copied or made available to others. It should not be considered as an offer to sell or a solicitation to buy any

security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as

such. We may from time to time have positions in and buy and sell securities referred to herein.

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