Dewan Housing Finance: Strong performance:: Kotak Securities

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Strong performance. Dewan Housing Finance (DHFL) delivered strong earnings (up
28% yoy) on the back of healthy NII growth (37% yoy). High loan growth (28% yoy)
and yoy NIM expansion due to higher share of debt market borrowings are key drivers.
We expect earnings growth to remain strong at 18% CAGR and RoEs at 17% over
FY2015-17E. Despite its outperformance, DHFL’s valuations are attractive – 7.2X EPS
and 1.2X book FY2017E. Retain BUY

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NII growth strong; fees weak
DHFL reported a strong quarter with 28% yoy growth in PAT (before DTL) to `2.8 bn. NII grew
37% yoy on the back of 28% AUM growth and 18 bps yoy expansion in NIM to 2.8%. Other
income declined 31% yoy, led by weaknesses in third-party distribution (primarily insurance)
fees. Costs-income ratio was stable at 30%. Credit cost for the quarter was 22 bps
(annualized); gross NPLs remained stable at 0.77% of loans.
Decline in borrowing costs drives NIM expansion even as lending rates decline
DHFL’s NIM improved by 18 bps yoy to 2.8% (stable qoq). Lending spreads expanded by 15 bps
yoy to 2.8% led by sharp decline in borrowing costs.
Costs of borrowings declined by 80 bps yoy to 10.1% (calculated), driven by the following:
 Decline in costs of borrowing in the system (down ~40 bps for AA-rated companies since
September 2014 (Exhibit 2)
 Shift in borrowing mix towards a higher share of NCDs (refer to Exhibits 4-5)
 Recent credit rating upgrade by CARE to AAA from AA+
Yield on advances declined 70 bps yoy to 12.9% (stable qoq) as DHFL partially passed on lower
borrowing costs to the lending side. The company reduced incremental lending rate in the tier-
1 retail markets to 10.15% from ~12% earlier. While share of (high-yielding assets) LAP
increased to 18% from 14% in 3QFY14, decline in retail lending rate pulled down overall
lending yields.
Loan growth strong at 28% yoy
DHFL reported a strong AUM growth at 28% yoy to `526 bn, driven by 22% growth in
disbursements (`49 bn). Lower borrowing costs helped DHFL re-price loans at competitive rates
to peers, thereby driving market share gains, in our view. We forecast 24% yoy loan book
growth for FY2015E and 22% CAGR growth during FY2015-17E on the back of (1) aggressive
branch expansion, (2) competitive lending rates post the recent rating upgrade and (3) recent
tie-ups with developers in tier-I and tier-II cities.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily19012015tn.pdf