Dewan Housing::Niche expertise in an under-penetrated market:: Religare Research

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Dewan Housing Finance Corporation Ltd
Niche expertise in an under-penetrated market
We initiate coverage on Dewan Housing Finance (DEWH) with a BUY rating and
a target price of Rs 370/sh. We like DEWH for its niche positioning in tier II and
III cities in India where we believe pricing power is strong due to lower
competition from leading players. Higher pricing power would help the company
maintain margins even in a rising interest rate environment. DEWH’s loan book
and disbursals are likely to grow faster than other HFCs due to the low base and
under-penetration in semi-urban markets. Following the recent equity dilution,
the company is adequately capitalised for growth with a CAR of 23% at the end
of Q1FY11. Asset quality is comfortable with gross NPA likely to remain at ~1%
through FY13. Valuations too are attractive at 1.8x BV and 10x EPS on FY12E—a
significant discount to large HFCs.

Loan book to grow at 40% CAGR: We expect DEWH’s total disbursals and loan
book to grow at a 35% and 40% CAGR respectively over FY10-FY13, supported
by robust demand in the housing sector, lower financial penetration in semi-urban
areas and the company’s widening marketing network. In the last two years,
DEWH has expanded its distribution network by 77% to 342 points of presence
and has tied up with United Bank of India and Punjab & Sind Bank to provide
home loans to their customer base. It has also entered into an agreement with
Central Bank of India to leverage the latter’s distribution network in central India.


NIMs to be maintained at ~3%; fee income to boost profitability: We expect
NIMs to be maintained at ~3% as we believe the company would be able to pass
on its higher borrowing costs. DEWH is focused on increasing fee income
through insurance distribution (wherein it books income equal to 1% of loan
disbursement) and by providing technical services to developers in tier II and III
cities. We expect fee income to grow at a 26% CAGR over FY10-FY13.

Healthy asset quality and capital position: Asset quality has improved in the last
three years, with gross NPA declining from 1.6% in FY08 to 1.1% in FY10 and
likely to remain at ~1% through FY13. With higher provision coverage (to be
facilitated by selling a part of its stake in HDIL), the company’s net NPA is likely
to reduce from 0.9% in FY10 to 0.4–0.5% through FY13. This apart, we note that
DEWH is adequately capitalised for growth following the recent equity dilution.
CAR stood at 23% at the end of Q1FY11 with a tier I ratio of 22%.

Valuations attractive; initiate with BUY: At current valuations of 1.8x FY12E BV
and 10x FY12E EPS, the stock is attractively priced when compared to other
HFCs. We expect NII and EPS to grow at a 44% and 29% CAGR respectively
over FY10-FY13 and believe that the strong growth momentum in loan book and
earnings would be a key catalyst for a further stock re-rating.