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Dewan Housing Finance Ltd
Dewan Housing Finance Corporation Ltd (DHFL), Wadhwan housing private
limited and Caledonia investments have acquired 100% in Deutsche Post bank
home finance (DPHFL) for a consideration of `10.8 billion. Post the transaction,
DHFL will hold 67.5% stake in the company.
Deutsche Post bank home finance limited (DPHFL)
Deutsche Postbank Home Finance Ltd. (DPHFL) is a National Housing Bank
(NHB) registered housing finance company. The company is a fully owned
subsidiary of Deutsche Postbank, AG, Group, which is the largest retail bank in
Germany. The company has over 32,000 customers and has 25 branches, 14 sales
office and 3 processing units across India. The home loan portfolio is `48.13 billion
as on Sep 2010.
Geographical Presence
In terms of geographical diversification, DPHFL’s portfolio is concentrated in
NCR, although concentration is declining from 46% on March 31, 2006 to 37% on
March 31, 2010. Other states for DPHFL include: Karnataka (16%), Maharashtra
(13%), Andhra Pradesh (10%) and Tamil Nadu (5%).
Loan Book
The loan book of DPHFL grew at a CAGR of 19.1% during FY08-10. Individual
home loan constitute 87% of the loan portfolio. However the non-housing portfolio
is increasing over the years and going forward, over the medium term, the company
plans to increase its high yielding non-housing loan book. The non-housing loan
book constitutes loan against properties and other loans. The yields in the nonhousing segment are 300 bps higher than those in the home loan segment. The
disbursements have grown by 26% during the same period. The average ticket size
for housing loans continued to be around `15 lacs in 2009-10. The company
intends to achieve a disbursement growth of 30% during FY11.
Borrowing profile
The funding profile of DPHFL is well diversified and includes borrowings from a
large number of banks, NCDs and NHB refinance. However banks continue to be a
dominant source of funds for the company.
Asset quality
The Gross NPA% for DPHFL is at 0.77% on March 2010. The company continues
to maintain 100% provision on its Gross NPAs; as a result of which Net NPA’s are
zero. Going forward, as the company intends to increase its non-housing portfolio,
which is relatively riskier, maintaining asset quality will be a critical factor.
Net interest margins
The net interest margins for the company have been maintained at more than 3%
for the past three years. Going forward, the company intends to improve the
margins by 20-30 bps.
Fee income
The company is targeting to ramp up its financial product distribution – mainly
insurance products to drive its fee income growth. At present the company is
involved in selling life insurance linked to home loans.
Synergies for DHFL
Access to northern regions-With strong presence in southern and western
states the acquisition gives DHFL access to northern regions as DPHFL
has ~40% of the portfolio concentration is in these regions.
Access to individual in the higher income segment where DHFL was not
present. The average ticket size for DPHFL is around `1.5m compared
with around `0.7 mn for DHFL.
DHFL also intends to augment its fee income by cross selling insurance
products to customers of Deutsche Postbank and thereby increasing
Deutsche Postbank’s ROE, which is low currently at 14.5%.
Funding of the deal
The consideration required to be paid by DHFL is `7.3 billion which the company
is expected to fund through tier II capital. The company has already raised `3.5
billion from Tier II placement of bonds and expects the balance also to be raised in
same form. DHFL expects the combined CAR post the deal to be in the range of
~18-20% with Tier II capital at ~8-9%.
Valuation and Recommendation
We expect DHFL to register a 42% growth in its loan book during FY10-12. In a
rising interest rate environment we expect DHFL to pass on the rise in cost of funds
to its borrowers thereby maintaining margins. With strong loan growth, we expect
net profits to register a 47.2% CAGR during FY10-12.
We have presented herewith proforma financial statements of the subsidiary
company Deutshce Postbank based on the available information and the
management expectations. However we have not consolidated the same with the
company pending clarity on the financial as well as business integration.
We believe the acquisition will be positive for DHFL in the long term as it gives
access to a new segment as well as region where the company was not present
earlier. Also the quality of the asset is superior as compared to DHFL considering
the zero NPA’s.
Given the strong performance, improving asset quality and coverage ratio, we
continue to be positive on the company. We maintain our “ACCUMULATE”
recommendation on Dewan housing Finance Ltd with a target of `344. (2.1x
P/ABV of `164 of FY12).
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