Dewan Housing Finance: Buy

Fresh investments with a three-year horizon can be considered in the stock of Dewan Housing Finance, the third largest housing finance company in India. It focuses on financing low- and middle-income customers and has a predominant presence in non-urban areas where housing finance is relatively under-penetrated. It is now diversifying its customer base and geographical presence through acquisitions and strategic tie-ups.

Given the growing affordability and huge requirement of houses in the semi-urban and rural areas, the loan book of Dewan Housing is expected to grow at faster than the industry.

The 12th Five-Year Plan Working Group Report on Urban Housing estimated the investment requirement for affordable housing at Rs 8.5 lakh crore. The recent Budget's focus on affordable housing by increasing outlays for rural housing fund, extension of interest subvention on housing loan for another year will also benefit Dewan Housing Finance.

The stock trades at an attractive valuation. At the current price of Rs 244, it trades at 1.24 times its December end consolidated book value (inclusive of capital raised), which is attractive for a financing company that is into secured lending. The valuation is at a steep discount to other HFCs such as HDFC, Gruh Finance and LIC Housing Finance.

The company's loan book is expected to grow at a faster pace than the other two housing finance companies — HDFC and LIC Housing Finance.

This, coupled with rising average ticket size, will not only reduce the cost-to-income ratio of Dewan Housing but will also support its profitability. The average ticket size of Dewan Housing Finance is Rs 7 lakh as against Rs 19 lakh of HDFC.

Secured nature of lending, rising fee income contribution and strong capital adequacy levels following the recently concluded Qualified Institutional Placement are the other key positives. The company acquired First Blue Housing Finance from Deutsche Post-Bank last year.

Diversifying client base

Dewan Housing with a strong presence in low and middle-income segment has widened its canvas, post the acquisition of First Blue Housing, which focuses on upper-middle class home financing. Currently, the company is present across the customer value chain, thanks to the acquisition of First Blue and setting up of Aadhar Housing which caters to the under-served low-ticket customers.

The company has entered into strategic tie-ups with Yes Bank, Central Bank of India, Punjab and Sind Bank and United Bank of India to increase its point of presence while incurring lower costs. The total point of presence of Dewan Housing Finance as of December 2011 was 437, Pan-India. Of these, 300 branches belong to Dewan Housing and its subsidiaries while the rest are through alliances.

The standalone loan book of Dewan Housing grew by 56 per cent in FY09-11. It has managed to sustain the growth rates this year too. As of December 2011, the loan book growth was 51 per cent year-on-year.

The growth in less than Rs 20 lakh loans for banks during the year ended December 2011 was only 2 per cent, indicating a rising market share for Dewan. After discontinuing teaser loans, banks' loan book growth in home loans moderated.

The consolidated loan book of Dewan Housing Finance crossed Rs 25,000 crore as of December 2011.

Branch model

The company operates through branches unlike the direct selling agent model adopted by other housing finance companies.

Since this increases accountability of Dewan Housing's staff in terms of loans origination and monitoring, it has allowed the company to keep its non-performing assets under control. This is despite having a chunk of loans to risky segments such as self-employed customers and non-housing loans.

Self-employed customers account for a quarter of its loan book, while commercial and project loans account for about 13 per cent of the loan book.

The company's loan-to-value of the house is 67 per cent, which gives it sufficient cushion against property price correction. The instalment-to-income also does not exceed 40 per cent.

The proportion of non-performing assets to total assets of Dewan Housing was 0.9 per cent. First Blue Housing's stressed asset, as a proportion of assets, was 0.96 per cent. The provision coverage for stressed assets at 81 per cent further reduces the risk of sharp slippages.

Margins to improve

The net interest margin of Dewan Housing for the nine-months ended December 2011 was 2.78 per cent as against 2.96 per cent during the year 2010-11. Sharp rise in cost of funds during the nine-month period led to margin pressure. The company depends heavily on bank fund, but plans to diversify to cheaper avenues of financing such as debenture borrowing and refinancing from NHB. Bank financing accounted for almost three-fourths of its December end borrowing. It plans to bring it down to 40 per cent of the total borrowing over the next three years.

This, coupled with cut in interest rates, is expected to aid margins of Dewan Housing. While the lag effect in raising rates affected its margins in the rising cycle, cut in rates would expand its margins.

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