INITIATING COVERAGE 30 OCT 2017

Dewan Housing Finance Corp.

BUY
INDUSTRY HFCs Galloping ahead
CMP (as on 27 Oct 2017) Rs 610 Dewan Housing (DHFL) is the fourth-largest housing opportunities, especially in the affordable housing
Target Price Rs 685 finance company in the country, with an AUM of Rs segment.
Nifty 10,323 941bn as on 2QFY18. It provides home loans mainly  Strong presence in low-ticket size: DHFL has a strong
Sensex 33,157 in the peripheries of metros and Tier II/Tier III presence in Tier II/Tier III cities. It has a pan India
KEY STOCK DATA cities, targetting both the salaried and self- geographical presence, with the western region
employed sections. Low up-country mortgage contributing ~40% to disbursements. Given its focus
Bloomberg DEWH IN on low-ticket size loans, we believe DHFL would
penetration, government’s impetus for ‘Housing for
No. of Shares (mn) 314 benefit greatly from the affordable housing push by
All’ and incentives for affordable housing bode well
MCap (Rs bn) / ($ mn) 192/2,949 the government and low penetration levels.
for the company.
6m avg traded value (Rs mn) 2,171  Improving COF: DHFL has reduced its borrowing cost,
Recent initiatives to strengthen management team owing to improved rating and a higher share of funds
STOCK PERFORMANCE (%)
and internal processes have resulted in encouraging from the wholesale market. This has strengthened its
52 Week high / low Rs 651/214
outcomes. Disbursements grew 42% in 1HFY18 Vs competitive positioning.
3M 6M 12M 18.1% in FY17. We expect C/I to improve 300+bps  Strengthening of management team: Over the last
Absolute (%) 36.0 44.6 88.5 to 24.8% by FY20E, as internal efficiencies ride few quarters, DHFL has roped in professionals with
Relative (%) 33.6 34.2 69.7 business growth. strong functional experience to lead key roles. This,
SHAREHOLDING PATTERN (%) along with the new ERP system, is expected to lead to
We expect a 19.8% CAGR rise in AUMs over FY17- higher operational efficiency and profitability.
Promoters 39.2 20E. An improving credit rating (AAA/CARE,  Asset quality: Over the last few years, DHFL’s GNPA
FIs & Local MFs 12.2 A1+/ICRA), and a rising share of wholesale debt in has ranged from 0.8-0.95%. We expect the company
FPIs 23.8 the borrowing mix will help maintain NIMs, despite to maintain its asset quality at current levels.
Public & Others 24.8 rising competition. The share of the Non-home loan
FINANCIAL SUMMARY
Source : BSE
segment has increased to ~35%, and this is (Rs Mn) FY16 FY17 FY18E FY19E FY20E
expected to continue. RoA/RoE should touch NII 15,435 18,629 22,964 28,758 33,413
1.39/15.8% respectively by FY20. PPOP 11,546 15,057 18,916 23,892 27,854
Despite a ~45% run-up in the last six months, DHFL Adjusted PAT 6,066 8,124 10,752 13,668 15,918
Vishal Rampuria trades at 2.1x FY19E ABV, much cheaper than Adj. EPS (Rs) 20.8 25.9 34.3 43.6 50.8
vishal.rampuria@hdfcsec.com peers. Initiate coverage with a BUY. Our TP is Rs ROAE (%) 12.6 12.5 12.9 15.0 15.8
+91-22-6171-7325 ROAA (%) 1.08 1.21 1.33 1.40 1.39
685/sh (2.25x Sept-19E ABV).
Adj. BVPS (Rs) 160 242 262 288 320
Amey Chheda  Huge opportunity: At 9%, India’s mortgage P/ABV (x) 3.8 2.5 2.3 2.1 1.9
amey.chheda@hdfcsec.com penetration is low, with Tier II and III cities witnessing P/E (x) 29.3 23.5 17.8 14.0 12.0
+91-22-6639-2478 even lower levels. This offers DHFL huge growth Source: Bank, HDFC sec Inst Research
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

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
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
DEWAN HOUSING : INITIATING COVERAGE
 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.
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 DEWAN HOUSING : INITIATING COVERAGE

AUM Growth Disbursement Grew Strongly During 1HFY18

Loan book (Rs.Mn) YoY growth % - RHS Disbursement (Rs. Mn) YoY growth - RHS
1,000,000 30% 300,000 45.0%
40.0%
25% 250,000
AUM has grown at a CAGR of 800,000 35.0%
23.3% during the last four years 20% 200,000 30.0%
600,000
25.0%
15% 150,000
400,000 20.0%
10% 100,000 15.0%
200,000 10.0%
5% 50,000
5.0%
- 0% 0 0.0%

1HFY18
FY14

FY15

FY16

FY17

1HFY18
FY14

FY15

FY16

FY17
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research

Despite expanding to other

AUM Is Concentrated In Western Market Share Of Self-Employed Has Increased
regions, West India’s
domination will continue Self-employed Non-self employed
East
2% 100
South
20% 90
80
51
70 66 61
71 76 73
60
50
Share of non-salaried has 40
increased, owing to increasing West 30
exposure to Non-h loan 49
54% 20 34 39
29 27
products North 10 24
24% 0

FY12

FY13

FY14

FY15

FY16

FY17
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research

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 DEWAN HOUSING : INITIATING COVERAGE

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

Avg Home loans LAP Project loans SME
Ticket
Product Yield LTV Tenure 100%
Size Rs
90%
Mn
80%
Home Loan 8.35-11% 60-80% Upto 20 yrs 1.8 70%
Share of LAP and Project Loans LAP 9.5%-13% 40-50% Upto 15 yrs 4 60%
have increased over a period of Construction 50%
13-15% 40-50% 5-7 yrs 600
time, which fetches higher Finance 40%
spreads SME 13-15% 5-7 yrs 8-9 30%
Source : Company, HDFC sec Inst Research 20%
10%
0%

1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
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
Expansion of branch network Mortgage Loan as a % of GDP
380
has helped in better reach and 357 70%
360 346 345 62%
growth 60%
340
50%
320 40%
293 40% 36%
300 290 32%
30%
280 18% 20%
20%
260 9%
10%
240 226
Despite growth over the last 220
0%

Taiwan
Thailand

Malayasia

USA
India

China

South Korea
decade, mortgage penetration 200
is low
FY12

FY13

FY14

FY15

FY16

FY17

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

Page | 4

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
DEWAN HOUSING : INITIATING COVERAGE
Advantage affordable housing
 Huge housing shortage: According to a KPMG report, interest rebates, and (2) Subsidy for individual
India currently has a shortage of ~60mn housing construction.
units. This is expected to rise to 111mn units by FY22. On the supply side, the government has provided
Urban housing is expected to account for ~85 to 90% impetus by (1) In situ –providing land for slum
of the total requirement, as people migrate to urban redevelopment, (2) Public-private partnerships for
areas. Affordable urban housing is expected to affordable housing projects, and (3) Incentives for
constitute ~70% of the total requirement for urban construction of affordable housing projects.
housing. Further, of the total requirement of 111mn
units, nine states (Uttar Pradesh, Bihar, Maharashtra,  Pradhan Mantri Awas Yojana (PMAY): The
West Bengal, Madhya Pradesh, Andhra Pradesh – ‘Housing for All (Urban)’ mission for urban areas
including Telangana, Rajasthan, Tamil Nadu, and is being implemented during 2015-2022. This
Karnataka) will be contributing ~ 70%. mission intends to provide central assistance for
providing housing for all eligible families/
Housing Shortage beneficiaries who don’t own a brick and mortar
Particulars (mn units) Urban Rural Total house. The government has an ambitious target
Current housing shortage 19 40 59 of building 20mn homes in India, with loan
Required housing by 2022 26-29 23-25 49-54 disbursements of Rs 1.3tn over the next three
Total need 44-48 63-65 107-113 years.
Source: KPMG, HDFC sec Inst Research
 The net present value (NPV) of the interest
 Govt’s focus on affordable housing: Apart from the subsidy will be credited to the loan account of
huge requirement for housing, the government too the borrower.
has taken initiatives (on both demand and supply  During FY17, Rs 3.8bn of the subsidy was
sides) to provide a fillip to the affordable housing disbursed. With the scheme for MIG in place and
sector. To fuel demand, the government has taken a supply boost, it is expected to further increase
the following steps i.e. (1) Credit-linked subsidy - 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
Household income of Rs 0.3 to
LIG Up to 60 sq.m of the loan, whichever is lower, for loans up to Rs 0.6mn.
Rs 0.6 mn
Household income of Rs 0.6 to Interest subsidy of 4% for a tenure of 20 years or during tenure of
MIG I Up to 90 sq.m
Rs 0.12 mn the loan, whichever is lower for loans up to Rs 0.9 mn.
Household income of Rs 1.2 to Interest subsidy of 3% for a tenure of 20 years or during the
MIG II Up to 110 sq.m
Rs 1.8 mn tenure of the loan, whichever is lower for loans up to Rs 1.2 mn.
Source: NHB
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 DEWAN HOUSING : INITIATING COVERAGE

 Changes in Central Budget 2017 have boosted the
affordable housing sector -
Central govt. has given strong  Allocation of PMAY-Urban has increased from Rs
49.4bn to Rs 60.4bn
fillip to the affordable housing
segment, with a slew of  Refinancing target for NHB increased 15% to Rs
200bn
changes
 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

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 DEWAN HOUSING : INITIATING COVERAGE

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

No of Affordable Houses Total Investment Approved Central Assistance Approved
State
Sanctioned (Rs.Bn) (Rs.Bn)
Top 10 states account for 80% Andhra Pradesh 541,300 310.6 81.4
of the sanctions 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

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 DEWAN HOUSING : INITIATING COVERAGE

Comparison With Large-Sized HFCs

DHFL Is The Fourth Largest Avg. Ticket Size
DHFL HDFC LICHF PNB HF Rs mn
AUM (Rs bn) 3.5
3.15

3,385
4,000
Amongst large HFCs, average 3

2,915
3,500
2.56
ticket size for DHFL is low

2,533
3,000 2.5 2.2

2,254
1,955
2,500 2 1.8

1,445
2,000

1,252
1.5

1,084
1,500

913

836
778
1

695
1,000

569
448

415
361

276
168
0.5

106
500

66
- 0
FY13 FY14 FY15 FY16 FY17 DHFL HDFC LICHF PNB HF

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

Most HFCs have now a sizeable Product Mix Comparison NIMs Are Lower
Home loans Non-Home loans DHFL LICHF HDFC PNB HF
portion of the Non-Home mix, %
100%
which is critical to generate 14% 16%
5.0

4.3
spreads and return ratios 28% 4.5

4.1
34% 33% 33%

4.0
80% 39%

3.9
41%

3.7
4.0

3.2

3.2

3.2
60% 3.5

2.9
2.8
2.8
2.7

2.7
2.7

2.6
3.0

2.5
2.5
2.4

2.4
2.3
40% 86% 84% 2.5
72% 66% 67% 67% 61% 59% 2.0
20% 1.5
1.0
0%
2016 2017 2016 2017 2016 2017 2016 2017 0.5
0.0
DHFL HDFC LIC HF PNB HF FY13 FY14 FY15 FY16 FY17

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

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 DEWAN HOUSING : INITIATING COVERAGE

C/I Comparison Gross NPA On Loan Book Is Higher Owing To

Exposure To Middle-To-Low Income Groups
DHFL HDFC LICHF PNB HF DHFL LICHF HDFC PNB HF
% %
40.0 1.0 0.9 0.9
34.5 35.6 0.9 0.8
35.0 31.9 32.2 0.8
0.8 0.8
34.8 28.3 0.7 0.7
30.0 33.1 0.7 0.7
30.7 0.7
30.1 0.7
25.0 27.9 0.6 0.7
0.6 0.5
20.0 0.5 0.4
DHFL’s GNPA is relatively high,
0.4
owing to exposure to middle- 15.0 16.3 0.2
14.5 15.2 14.7 15.9 0.3
to-low income groups where 10.0 0.3
0.2
delinquencies are higher 5.0 0.2 0.2 0.2
7.4 7.7 7.4 6.6 6.8 0.1
0.0 0.0
FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17

Source : Company, HDFC sec Inst Research

ROA Is A Tad Lower Owing To Higher COF ROE Comparison

DHFL HDFC LICHF PNB HF DHFL LICHF HDFC PNB HF
%
%
25.0
3.0
2.65 2.60
2.48 2.59 22.0 21.6 21.8
ROE is lower owing to lower 2.5 2.47 20.6 21.0
19.6
NIMs and higher C/I 2.0
20.0 18.8 19.1
1.65 18.0 18.1
1.48 1.53
1.43 1.47 16.7
1.5 1.41 1.37
1.49 17.1
1.38 0.94 1.37 16.8 14.9
1.0 1.33 1.21 15.0 15.5 16.1
1.08 14.9
1.33 13.6
0.5

0.0 10.0 11.3

FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17

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

Page | 9
 DEWAN HOUSING : INITIATING COVERAGE

Increased competition in the Home Loan segment

 Competition in the home loan business has increased, falling to 18% in FY17 from 21% in FY15. We continue
as banks are focussing on Retail loans, given lower to expect high competition in the home loan
loan demand from corporates. This, along with weak business, owing to strong asset quality, despite lower
market conditions, has resulted in HFC growth rate yields.

Growth rate for banks in the Banks Giving Tough Competition to HFCs Non-home Loan Growing Faster for HFCs
Banks HFC's Home loan Growth (%) Other loans Growth (%)
mortgage segment improved, Banks Growth (%) - RHS HFC's Growth (%) - RHS Overall Portfolio (%)
as they started focussing owing
100% 30 35
to sluggish corporate loan 26
25 30
demand 80% 21 26 26 27 29
20 20 25
19 18 20 21 22 21
60% 20 22
20 20 19
18 18 15 19 21 19
17 15 18
40% 15 15
10 10
11
20% 5 5
0% 0 0
FY13 FY14 FY15 FY16 FY17 Jun-17 FY14 FY15 FY16 FY17 Jun-17

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

Declining Spreads On The Mortgage Product

Owing to Competition
10-year G-Sec yield (%) SBI Home Loan rate (%)
Spreads (%)
12 10.0 10.0
Mortgage Spreads with 9.3 9.4 9.5 9.1
10 8.4 8.4
respective to G-Sec has shown 8
a downward trend in last few 8.6 8.7
6 7.8 7.5 7.6
7.0 6.7 6.8
quarters owing to increasing 4
competition 1.5 1.9 1.8 2.1 1.7 1.5
2 1.4 1.3
0
Dec '13

Aug '14

Oct '15

Oct '17
May '16

Apr '16

May '17
Nov '16

Source : Company, HDFC sec Inst Research

Page | 10
 DEWAN HOUSING : INITIATING COVERAGE

Gross NPAs stable

 DHFL has stable GNPAs at 0.94%. Asset quality has underwriting processes. Valuation report is provided
remained stable, despite a higher share of the Non- by approved vendors, which results in better control.
home loan book.
 On the non-housing side, GNPAs are largely stable,
 Asset quality is supported by the in-house sourcing of though NPAs are high in the commercial segment.
loans, supported by healthy operational and
Asset quality has been stable
for DHFL GNPA Trend NNPA
GNPA (%) 2 yrs Lagged %
NNPA (%)
1.80 0.70
0.68
1.60 0.65
1.43 1.41 0.58
0.60
1.40 1.33
1.31 1.29 0.55 0.58
0.54
1.20 0.52
1.17 0.50 0.50
0.95 0.93 0.94 0.45 0.45
1.00 0.90 0.88
0.85 0.40
0.80
0.35
0.60 0.30
FY15 FY16 FY17 FY18E FY19E FY20E FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Source: Company, HDFC sec Inst Research

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 DEWAN HOUSING : INITIATING COVERAGE

Disbursement growth accelerates

Growth driven by improving
internal processes
DHFL has undertaken many process-level changes, along  Focussing on approved projects which will help in
with sales workforce target area realignment, which have faster turnaround and approval timelines.
resulted in improved productivity and faster turnaround
Disbursement Mix
time. The growth momentum in the last two quarters is
visible. Despite a sluggish growth demand environment, Home Loans LAP Project Finance SME
100
disbursement has grown by 42% during 1HFY18. Within
90
the segments, LAP has grown 249% YoY/38% QOQ owing 80
to strong demand for accounted money owing to GST 70
from small traders and manufacturers. 60
DHFL has made the following operational changes: 50
40
 Back office operations have been moved to 30
centralised offices in Mumbai and Hyderabad. This 20
will help in better underwriting and resource 10
planning, and improved productivity. 0

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

1QFY18

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
2QFY18
4QFY17
 Implementing end-to-end ERP system which will
replace the current Legacy system, which is not
efficient.
Source: Company, HDFC sec Inst Research
 Working on providing mobility systems encompassing
the entire loan cycle, from log-in to disbursement to
collection.

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 DEWAN HOUSING : INITIATING COVERAGE

Non-home loan book helps maintain spreads

 During the last two to three years, DHFL is focussing
Non-Home loan product share
has gone up n the last 4 years;
mgt has guided this to remain
in the current range
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 NIM Trend

Book
Non-Home loan segment grew
Home Loan LAP Construction Finance SME/Others %
48% in FY17
100% 3.0
2.7 2.8
90% 2.8
2.6 2.5 2.5
80%
70% 2.4
2.2
60%
2.0
50%
1.8
40%
1.6
30%
1.4
20%
1.2
10%
1.0
0%

FY14

FY15

FY16

FY17
FY14

FY15

FY16

FY17

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

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 DEWAN HOUSING : INITIATING COVERAGE

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
DHFL’s bank borrowings’ strong credit rating. While the company has an
contribution has dropped from outstanding AAA rating from CARE, other agencies
61% in FY15 to 42% in FY17. 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

Banks NCD/DCM FD ECB NHB %
100% 11.0 10.5
90% 10.2
80% 10.0 9.5
70% 8.9
9.0 8.7
60% 8.4
50%
RBI’s relaxation on sectoral cap 40% 8.0
for HFCs has increased funds’ 30%
availability for the sector by 20% 7.0

~Rs 500bn. 10%

6.0
0%
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
5.0
FY15 FY16 FY17 FY18E FY19E FY20E

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

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 DEWAN HOUSING : INITIATING COVERAGE

Insurance investment monetisation

 DHFL has closed a deal with the promoter entity,
wherein it has sold 50% of its stake in DHFL Pramerica
The book value of the
for Rs 20bn. The investment had a book value of Rs
Insurance venture investment
310mn, resulting in a profit of Rs 19.7bn. DHFL
was merely Rs 310mn 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 Wadhawan Group is emerging as a financial
The transaction has boosted its net worth by 33% to
Rs 80bn.
 Transaction summary: The stake in DHFL Pramerica
The transaction was based on a Life Insurance was transferred to a 100%-owned
valuation report from Wilson, a subsidiary for Rs 20bn. The subsidiary has issued a
renowned global firm 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.
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

Dewan Housing
Finance (DHFL)

9.47% 12.37% 36.78% 50%

DHFL
Avanse
DHFL Aadhar Pramerica
Education
Vysya HFC HFC Asset
Loans
AUM Rs AUM Managers
AUM Rs
20.67bn 39.62bn AUM Rs
14.07bn
276.71bn

Source : Company

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 DEWAN HOUSING : INITIATING COVERAGE

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
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
Harshil Mehta Joint MD & CEO
(Finance) from Graduate School of Business, Mississippi State
University, USA. He is with the group since 2011, and was recently
elevated as Joint MD.

Enhanced mgt team is expected Santosh Nair brings with him over two decades of experience in
the banking Industry, with expertise in sales and distribution,
to drive operational efficiency
operations and manpower management. Prior to joining DHFL,
Santosh Nair Chief Business Officer
Nair served as Executive Vice President, Business Head Home
Loans and Unsecured Loans with HDFC Bank. He joined the
company in May 2017.
Vivek comes with nearly two decades of multifaceted experience
in Financial Services, Collections, Operational Strategy, Greenfield
Vivek Kannan Chief Operating Officer 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
Pareek comes with about 15 years of multifaceted experience in
investment and portfolio domain with expertise in Treasury,
Bharat Pareek Head of Treasury Working Capital and Funds Management. Prior to joining DHFL,
Pareek was associated with Reliance Industries Limited, as Vice
President, Treasury.
Source: Company

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 DEWAN HOUSING : INITIATING COVERAGE

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 We expect growth to be balanced across segments,
last three years, driven by higher contribution from unlike the last three years, when the growth rate of
the non-housing book. We expect the company to home loans was 16% and Non-home loans was 44%.
sustain growth of 19.8% CAGR, driven by faster NIM is expected to be stable at the current level,
growth in the affordable segment in Tier II/III cities. driven by lower cost of funds.
Loan book to grow at a CAGR
of 19.8% over the next 3 years AUM Growth To Sustain NIM To Be Maintained
Rs bn %
3.5
1,650
1,438
1,450 2.9 2.9
3.0 2.8 2.8
We expect Home loan 2.7
1,215
1,250 2.5
contribution to marginally 1,018 2.5
improve from the current 1,050
836
65.8% to 66.1% by FY20 850
695 2.0
650 569
1.5
450

250 1.0

FY15

FY16

FY17

FY18E

FY19E

FY20E
FY15

FY16

FY17

FY18E

FY19E

FY20E
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research

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 DEWAN HOUSING : INITIATING COVERAGE

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
Employee cost forms 45% of
improve operational productivity and lead to savings
the operation cost 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

% Employee Depreciation Establishment
34.0
32.2 100%
32.0 90%
80%
30.0
27.9 70%
28.0 27.0 60%
25.3 50% 3% 3% 4%
26.0 24.8 5% 4%
40%
24.0 30%
20% 46% 46% 41% 41% 45%
22.0
10%
20.0 0%
FY16

FY17

FY18E

FY19E

FY20E
Majority of home loans are

FY13

FY14

FY15

FY16

FY17
sourced through their own
sales team. This helps in lower Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research
costs, along with better asset
quality

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 DEWAN HOUSING : INITIATING COVERAGE

PAT growth to sustain; ROE at 15.8%

 With loan book growth and an improving C/I ratio, we expected to improve to 1.39% in FY20. Similarly, ROE
expect PAT to grow faster at a CAGR of 25.1%. ROA is is expected to improve to 15.8%.

Improving C/I ratio, higher Trend In PAT ROE To Improve

Rs bn Adj PAT YoY growth % - RHS ROAA % ROE % - RHS
leverage and monetisation of
1.60 17.0
the land/building in Kalina to 18 45.0
16 16.0
help generate higher ROE 35.0 1.40
14 15.0
12 25.0 1.20 14.0
10 13.0
15.0 1.00
8 12.0
6 5.0 0.80 11.0
4 10.0
-5.0 0.60
2 9.0
0 -15.0 0.40 8.0
FY15

FY16

FY17

FY18E

FY19E

FY20E

FY15

FY16

FY17

FY18E

FY19E

FY20E
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research

Page | 19

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%
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
DEWAN HOUSING : INITIATING COVERAGE
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.
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 DEWAN HOUSING : INITIATING COVERAGE

Valuation and view

 DHFL is a play on the mortgage opportunity in Tier months, it is quoting at 2.1x FY19 P/ABV multiple. We
II/Tier III cities. Also, it is expected to be a beneficiary believe the stock should trade at 2.25x Sept’19 ABV.
of affordable housing opportunities, along with the We initiate coverage with BUY rating and a TP of Rs
under-penetrated demand of the self-employed 685/sh.
category. Despite the stock surging 40% in the last six
Despite a sharp run-up, the
stock has an upside 1 Yr Forward P/BV 1 Yr Forward P/E
700 900
2.75x 20x
800
600
700
500 2.25x 15x
600
400 500 10x
1.75x
300 400
1.25x 8x
300
200
200
100 100
0 0

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17
Jul-13

Jul-14

Jul-15

Jul-16

Jul-17
Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17
Apr-13

Apr-14

Apr-15

Apr-16

Apr-17
Jul-13

Jul-14

Jul-15

Jul-16

Jul-17
Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17
Apr-13

Apr-14

Apr-15

Apr-16

Apr-17
Jan-13

Jan-14

Jan-15

Jan-16

Jan-17
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research

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 DEWAN HOUSING : INITIATING COVERAGE

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
MCap CMP TP ABV (Rs) P/E (x) P/ABV (x) RoAE (%) RoAA (%)
NBFC/HFC Rating
(Rs bn) (Rs) (Rs) 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

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 DEWAN HOUSING : INITIATING COVERAGE

INCOME STATEMENT BALANCE SHEET

(Rs mn) FY16 FY17 FY18E FY19E FY20E (Rs mn) FY16 FY17 FY18E FY19E FY20E
Interest Earned 71,395 86,311 100,167 115,000 130,521 SOURCES OF FUNDS
Interest Expended 55,959 67,683 77,203 86,241 97,108 Share capital 2,918 3,132 3,132 3,132 3,132
Net Interest Income 15,435 18,629 22,964 28,758 33,413 Reserves and surplus 47,252 76,827 83,708 92,455 102,643
Other Income 1,605 2,261 2,957 3,223 3,647 Shareholders' funds 50,170 79,958 86,839 95,587 105,774
Total Income 17,041 20,890 25,921 31,982 37,061 Total Borrowings 610,496 812,645 914,320 1,067,460 1,236,429
Total Operating Exp 5,495 5,832 7,005 8,089 9,207 Other Liabilities, provisions 17,866 30,377 26,526 30,849 35,382
Employee Expense 2,276 2,625 3,088 3,613 4,128 Total 678,531 922,980 1,027,686 1,193,895 1,377,585
PPOP 11,546 15,057 18,916 23,892 27,854 APPLICATION OF FUNDS
Provisions & Contingencies 1,750 2,180 2,425 2,929 3,440 Advances 617,750 720,962 896,034 1,056,785 1,236,429
PBT 9,796 12,877 16,491 20,963 24,414 Investments 8,932 135,349 100,606 102,276 104,095
Extraordinary items 19,694 Fixed assets 7,805 8,427 8,595 3,267 3,365
Provision For Tax 3,730 4,754 5,739 7,295 8,496 Other Assets 44,044 58,242 22,451 31,567 33,696
Reported PAT 6,066 27,818 10,752 13,668 15,918 Total 678,532 922,980 1,027,686 1,193,895 1,377,585
Adjusted PAT 6,066 8,124 10,752 13,668 15,918 AUM 695,200 835,600 1,018,220 1,214,696 1,437,708
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Page | 23
 DEWAN HOUSING : INITIATING COVERAGE

KEY RATIOS
FY16 FY17 FY18E FY19E FY20E FY16 FY17 FY18E FY19E FY20E
VALUATION RATIOS ASSET QUALITY
Adj. EPS (Rs.) 20.8 25.9 34.3 43.6 50.8 Gross NPLs (Rs mn) 5,731 6,785 8,064 9,300 10,510
Earnings Growth (%) 41.0 33.9 32.4 27.1 16.5 Net NPLs (Rs mn) 3,610 4,194 4,019 3,497 2,643
BVPS (Rs.) 172 255 277 305 338 Gross NPLs (%) 0.93 0.94 0.90 0.88 0.85
Adj. BVPS (100% cover) (Rs.) 160 242 262 288 320 Net NPLs (%) 0.58 0.58 0.45 0.33 0.21
ROAA (%) 1.08 1.21 1.33 1.40 1.39 Coverage Ratio (%) 37.0 38.2 50.2 62.4 74.9
ROAE (%) 12.6 12.5 12.9 15.0 15.8 Provision/Avg. Loans (%) 0.31 0.33 0.30 0.30 0.30
P/E (x) 29.3 23.5 17.8 14.0 12.0 ROAA TREE
P/ABV (x) 3.8 2.5 2.3 2.1 1.9 Net Interest Income 2.74% 2.78% 2.84% 2.95% 2.91%
P/PPOP (x) 15.4 12.7 10.1 8.0 6.9 Non Interest Income 0.28% 0.34% 0.37% 0.33% 0.32%
Dividend Yield (%) 0.5 0.3 0.3 0.4 0.5 Operating Cost 3.02% 3.12% 3.21% 3.28% 3.23%
PROFITABILITY Provisions 0.97% 0.87% 0.87% 0.83% 0.80%
Yield On Advances (%) 12.7 12.9 12.4 11.8 11.4 Tax 0.40% 0.39% 0.38% 0.37% 0.36%
Cost Of Funds (%) 10.2 9.5 8.9 8.7 8.4 ROAA 1.08% 1.21% 1.33% 1.40% 1.39%
Spread (%) 2.5 3.4 3.4 3.1 3.0 Leverage (x) 11.7 10.3 9.7 10.7 11.4
NIM (%) 2.7 2.8 2.8 2.9 2.9 ROAE 12.6% 12.5% 12.9% 15.0% 15.8%
OPERATING EFFICIENCY Source: Company, HDFC sec Inst Research
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
17.0 19.3 18.3 17.1 16.2
(CAR)
Tier I CAR 13.3 14.9 14.3 13.6 13.0

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 DEWAN HOUSING : INITIATING COVERAGE

RECOMMENDATION HISTORY
Dewan Housing TP Date CMP Reco Target
700 30-Oct-17 610 BUY 685
600
500
400
300
200 Rating Definitions
100
BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
Feb-17

Sep-17
Nov-16

Jun-17
May-17
Dec-16

Mar-17
Oct-16

Oct-17
Aug-17
Apr-17
Jan-17

Jul-17
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

Page | 25
 DEWAN HOUSING : INITIATING COVERAGE

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 DEWAN HOUSING : INITIATING COVERAGE

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Mumbai - 400 013
Board : +91-22-6171 7330 www.hdfcsec.com
Page | 27