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Dewan Housing Finance Corporation Ltd
Low fee income and high staff costs drag down bottom line
Fundamental Grade Valuation Grade Industry 4/5 (Superior fundamentals) 5/5 (CMP has strong upside) Mortgage Finance


May 21, 2012 Fair Value CMP CFV MATRIX
Excellent Fundamentals

Rs 307 Rs 173

Fundamental Grade

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-oq 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.

5 4 3 2 1
Poor Fundamentals






Valuation Grade
Strong Downside Strong Upside
18.4% 1.1% 20.3% 0.8% 41.4% 43.6% 39.2% 35.2% Dec-11 DII Mar-12 Others

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

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100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jun-11 Promoter Sep-11 FII 39.3% 39.3% 42.0% 42.3% 17.7% 1.0% 17.5% 0.9%

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.

(Rs mn) Total operating income Pre-provision profit Adjusted net profit EPS P/E (x) P/ABV (x) ROE (%) ROA (%) Net NPA (%) Capital adequacy ratio (%) FY10 3,404 2,260 1,551 19 10.8 2.0 21.2 1.8 0.7 17.3 FY11 7,175 4,638 2,936 28 6.8 1.4 24.7 1.8 0.1 19.4 FY12# 8,435 4,985 2,952 25 7.2 1.2 17.8 1.2 0.0 19.0 FY13E 11,304 7,051 4,706 40 4.5 1.0 22.0 1.5 0.6 18.6 FY14E 13,246 8,002 5,291 45 4.0 0.8 20.1 1.3 0.7 18.3

Returns 1-m Dewan Housing NIFTY -8% -4% 3-m -15% -8% 6-m 3% -4% 12-m -6% -10%

Mohit Modi (Director) Elizabeth John Vishal Rampuria Client servicing desk +91 22 3342 3561

NM: Not meaningful; CMP: Current market price # abridged financials Source: Company, CRISIL Research estimates

For detailed initiating coverage report please visit: CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.