Dewan Housing Finance :Our target price raised by 16% :: Daiwa

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Dewan Housing Finance (DEWH IN) Rating:1
Our target price raised by 16%



What has changed?
• We have raised our six-month target price by 16%, as we believe the company now
deserves higher valuations post 2Q FY11 results, with improving asset quality and
our expectation of strong growth in loan disbursals for the next two-to-three years.
Impact
• We forecast Dewan Housing Finance’s (DEWH) disbursements to rise at a CAGR
of more than 30% for FY11-13 after recording a CAGR of 48% over FY08-10,
given the strong demand drivers in place, ie rising income levels, an increase in the
working population and a shift to a nuclear family system in India. We believe the
company is highly capitalised (a tier-1 capital ratio of 21.3% for 2Q FY11) and
should record around an 18.5% ROE for FY12. We expect the ROE to improve
further as the company leverages more in the next three-to-four years.
• Management forecasts disbursements of Rs60bn for FY11, an increase of 55%
YoY.
• Asset quality remains healthy, with gross non-performing loans (NPL) of 1.07%
and net NPLs of just 0.41%, with a provision-coverage ratio of 61.4% for 2Q
FY11. The company has sold some of its investment in Housing Development
& Infrastructure (HDIL) (HDIL IN, Rs270, 3) worth Rs354m and used it to
increase its provision coverage. A lack of dependence on direct selling agents, a
conservative loan profile (more than 70% of its loan book to salaried
individuals for 2Q FY11) and a low cost-to-income ratio of around 70% for 2Q
FY11 helped the company maintain healthy asset quality.
• We expect the strong performance of DEWH’s core parameters for 2Q FY11 to
continue for 2H FY11. The company recorded a strong increase in net interest
income of 61% YoY and 14% QoQ. The increase in disbursements was 71%
YoY and the net interest margin (NIM) was stable at around 3% for 2Q FY11.
Valuation
• Given the strong outlook that we see for disbursement growth for FY11-13,
healthy asset quality and a stable NIM, we now expect DEWH to trade at a PBR
of 2.3x on our FY12 BVPS forecast, based on our Gordon growth model
(compared to 2x previously). We have raised our six-month target price to
Rs390 (from Rs337) offering upside potential of around 21% from the current
share price. DEWH trades currently at steep discount valuations to its peers like
Housing Development Finance (HDFC) (HDFC IN, Rs707, 1) and LIC Housing
(Not rated) and we believe that this valuation gap should narrow.
Catalysts and action
• We maintain our 1 (Buy) rating on DEWH. We see the key catalyst for the stock
as potentially higher growth in loan disbursals compared with our expectations
and those of the market.