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YEARS Dewan Housing Finance Corporation Ltd Low fee income and high staff costs drag down bottom line
Fundamental Grade 4/5 (Superior fundamentals)
Valuation Grade 5/5 (CMP has strong upside)
Industry Mortgage Finance
1
May 21, 2012
Fair Value Rs 307
CMP Rs 173
For detailed initiating coverage report please visit: www.ier.co.in
CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.
Dewan Housing Finance Corporation Ltd’s (Dewan Housing’s) Q4FY12 earnings were below
CRISIL Research’s expectations. Adjusted PAT fell q-o-q due to lower fee income and higher
staff costs despite nil provisions. Consolidated loan book grew 28% to Rs 255 bn in FY12.
Dewan Housing divested 48.7% stake in DHFL Vysya Housing Finance (3% of consolidated
loan book) at 1.4x P/B. Though we reduce our earnings estimates, to largely factor in high
competition and lower fee income, we maintain the fundamental grade of 4/5 due to Dewan’s
strong presence in the fast-growing tier II-III cities.
Q4FY12 standalone result analysis
• Standalone loans grew 37% to Rs 194 bn in FY12 with rising contribution from project and
commercial loans (19% of total loans in FY12 vs. 6% in FY11). High-yield, high-risk project
loans grew 34% q-o-q, constituting 7% of total loans in FY12. The management has
guided that such loans will increase up to 10% in the next two years. However, the
company’s ability to manage this book is a monitorable for us.
• Net interest income grew 3.5% q-o-q due to modest loan book growth of 4.9% (lowest in
the past six quarters) to Rs 194 bn. NIM was flat at 2.86% despite higher mix of non-retail
loans. Non-interest income declined q-o-q as a) processing fees declined by 25% because
these fees as a percentage of loans fell from 1% to 0.85% due to competition; b) third
party fees fell 31%. Hence, non-interest income as a percentage of total income fell 724
bps to 25% in Q4FY12. Hence, total operating income fell 6.4% q-o-q to Rs 1,713 mn.
• Operational costs grew 16.4% q-o-q to Rs 806 mn due to bonus-led higher staff costs.
Staff costs as percentage of costs rose to 38% in Q4FY12 vs. 30% in Q3FY12. Hence,
cost to income grew 922 bps q-o-q to 47%. We expect it to moderate as income grows.
• As the company securitised Rs 16 bn (6% of AUM) in Q4FY12, provisions created on it
were reversed resulting in overall provisions turning negative. However, the securitised
pool carries first loss charge of 10-15%, which is part of contingent liability. Asset quality
was healthy with standalone gross NPAs at 0.68% and nil net NPAs.
• Adjusting for income from divestment of stake in subsidiary companies, PAT declined q-o-
q to Rs 652 mn. The company announced a dividend of Rs 3.5 per share in FY12.
• Due to the QIP infusion of Rs 3,043 mn at Rs 255.5 per share, the leverage improved to
11.8x in FY12 from 14.2x in FY11 and capital adequacy ratio improved to 18.95% from
17.1% in Q3FY12. Our estimates already factor in the QIP infusion.
Earnings estimates revised downwards
Due to the challenging business environment and increasing competition, we expect loan
book to grow at a two-year CAGR of 24% by FY14 vs. our earlier estimate of 26%. We expect
yields to be held up due to the high-yielding project and commercial loans in books. We
reduce our PAT estimates by 6% and 9% for FY13 and FY14 respectively.
Valuation: Current market price has strong upside
Following the reduction in earnings estimates, our fair value is revised from Rs 354 to Rs 307
per share. We have assigned a price-to-book (P/B) multiple of 1.4x FY14 adjusted book
value. At the current market price of Rs 173, our valuation grade is 5/5.
KEY FORECAST (Rs mn) FY10 FY11 FY12# FY13E FY14E
Total operating income 3,404 7,175 8,435 11,304 13,246
Pre-provision profit 2,260 4,638 4,985 7,051 8,002
Adjusted net profit 1,551 2,936 2,952 4,706 5,291
EPS 19 28 25 40 45
P/E (x) 10.8 6.8 7.2 4.5 4.0
P/ABV (x) 2.0 1.4 1.2 1.0 0.8
ROE (%) 21.2 24.7 17.8 22.0 20.1
ROA (%) 1.8 1.8 1.2 1.5 1.3
Net NPA (%) 0.7 0.1 0.0 0.6 0.7
Capital adequacy ratio (%) 17.3 19.4 19.0 18.6 18.3
NM: Not meaningful; CMP: Current market price # abridged financials
Source: Company, CRISIL Research estimates
CFV MATRIX
KEY STOCK STATISTICS NIFTY/SENSEX 4908/16215
NSE/BSE ticker DEWANHOUS
Face value (Rs per share) 10
Shares outstanding (mn) 115.6
Market cap (Rs mn)/(US$ mn) 20,926/426
52-week range (Rs)/(H/L) 270/176
Beta 1.5
Free float (%) 64.8%
Avg daily volumes (30-days) 154,004
Avg daily value (30-days) (Rs mn) 36
SHAREHOLDING PATTERN
PERFORMANCE VIS-À-VIS MARKET
Returns
1-m 3-m 6-m 12-m
Dewan Housing -8% -15% 3% -6%
NIFTY -4% -8% -4% -10%
ANALYTICAL CONTACT Mohit Modi (Director) [email protected]
Elizabeth John [email protected]
Vishal Rampuria [email protected]
Client servicing desk
+91 22 3342 3561 [email protected]
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42.0% 42.3% 41.4%43.6%
1.0% 0.9% 1.1% 0.8%
17.7% 17.5% 18.4% 20.3%
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Jun-11 Sep-11 Dec-11 Mar-12
Promoter FII DII Others
