Dewan Housing Finance: Buy

Attractive valuations, presence in segments that offer high growth opportunities and the secured nature of lending are the company's key positives.

Fresh investments can be considered in the stock of Dewan Housing Finance . Dewan Housing focuses on home loans to low- and middle-income groups and has a dominant presence in Tier-II and Tier III cities where housing finance continues to be under-penetrated. As of June 2011, the average loan ticket size of Dewan Housing is Rs 6.25 lakh, which is one-third that of HDFC.

Concerns on margin compression and asset quality slippages have led to the under-performance of the Dewan Housing stock. However, the concerns seem to be overdone and the current attractive valuations provide a good entry point for investments over a three-year time-frame.

In addition to its increased focus on the low- and middle-income segment, Dewan Housing recently acquired Deutsche Post Bank Home Finance (DPHF) and set up Aadhar Housing in association with International Finance Corporation, Washington. Both investments have widened its canvas in terms of loan book growth opportunities as they give access to income segments where the company has little presence.

At the current price of Rs 205.5, the stock trades at an attractive 1.22 times its estimated FY12 standalone book and equal to its FY13 book value. Its price-earnings multiple is 7.3. At these valuations, the stock trades at a steep discount to HDFC and LIC Housing. For instance, LIC Housing trades at 1.9 times the FY-12 book value. Apart from attractive valuations and the company's presence in segments which offer high growth opportunities, the secured nature of business with low non-performing assets and high proportion of floating rate loans (91 per cent of the loan book) are other key positives.

Expanding presence

Dewan Housing operates from 417 locations all over India. While its branches are concentrated in the western and southern region, it has formed alliances with Punjab and Sind Bank, Central Bank of India and United Bank for home loan origination from these banks' customers. These alliances have strengthened the company's presence in the Central, East and North regions. It also recently formed a similar alliance with Yes Bank to lend to its customers.

The company's long-term prospects look encouraging especially from the Tier-II and Tier-III branches. The Eleventh Plan projected a shortfall of 24.7 million housing units (99 per cent of this number is in low and middle-income group) suggesting good growth potential for the company. The shortage shows that demand may continue to outpace supply. The net interest margin of Dewan Housing fell from 2.96 per cent for the year ended March 2011 to 2.85 per cent in the June quarter due to rise in interest costs. The lag effect in terms of passing on the costs has led to the shrinkage in margins. The company hiked its lending rate by three percentage points since April 2011. Margins may, thus, improve marginally from the current levels going forward. Close to 91 per cent of the loans are floating rate in nature which should allow the company to pass on the costs effortlessly.

The net interest income growth for the quarter ended June 2011 continued to be strong at 48 per cent. However, the net profit growth moderated to 28 per cent due to sharp rise in operating expenses and fall in other income.

Majority of the loans continue to be retail in nature which prevents high delinquencies . There has been a marginal rise in NPAs of Dewan Housing with Gross NPA ratio rising to 0.77 per cent from 0.67 per cent. However, the threat of sharp slippage is unlikely, given that the assets are secured. The average loan-to-value at 67.7 per cent as of June 2011 also provides additional safety.

New investments

The company's consolidated housing loan book, as of June 2011, stood at Rs 21,352 crore. The outstanding loan book of the recently acquired DPHF was Rs 5,414 crore. Post-acquisition of DPHF, the company has got access to upper middle-class customers, which strategically fits into Dewan Housing's business. As of March 2011, DPHF's average ticket size was Rs 19 lakh compared to Rs 5.88 lakh of Dewan Housing.

Post-acquisition, the profitability parameters of DPHF have improved, given the higher efficiencies of Dewan Housing. The return on average asset went up from 1.62 per cent (March 2011 end) to 1.75 per cent (annualised) for the quarter ended June 2011.

Aadhar Housing Finance is an 80 per cent subsidiary, set up to cater to the under-served low-income segment. The maximum loan amount is capped at Rs 6 lakh. It lends to low-income generating families in UP, MP, Bihar, Chhattisgarh, Jharkhand and Orissa. There is little competition in this segment.

Positive Outlook

Dewan Housing plans to increase its borrowings from National Housing Bank to 25 per cent of the total borrowing over the long-term. Given the lower-cost of borrowings, it will be able to improve its spreads.

Increased focus on self-employed customer loans which have better yields will also aid the margins over the long-term. The ratio of loan to self employed customers to total loans has increased from 19 per cent to 21 per cent in three months.

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