Dewan Housing Finance: Monetizing value from life insurance business

14-Feb-2017

DHFL has entered into an agreement with the promoters to sell its 50 % stake in DHFL Pramerica Life Insurance JV (DPLI) for an amount in the range of INR16.9-20.2b. The DPLI stake will be sold to its wholly owned subsidiary DHFL Investment Ltd (DIL). To fund this transaction, DIL will issue compulsorily convertible debentures (CCDs) to the promoters ' entity (Wadhawan Global Capital).

Monetization of the stake will help the company to reduce the leverage on its balance sheet to ∼13x from ∼10x FY18. Strong net worth addition ( ∼30 %) will ensure dilution-free growth until FY20, in our view. We await further details on maturity of CCDs, taxation related to the deal and any specific clause related to the deal between the promoters and DHFL. The deal adds ∼INR60/share to BV, although RoE could reduce by ∼150bp over the near term.

Significant accretion to net worth

The current book value of DHFL 's investment in the insurance JV is a mere INR310m. Thus, virtually the entire proceeds from the stake sale will be capital gains. Our current estimate for the company 's FY18 net worth stands at INR68.3b. Post the stake sale, the net worth could increase to as much as INR88.5b (at the upper end of the valuation range without factoring in taxation). This implies ∼30 % increase in the book value for FY18.

Sharp improvement in capital adequacy without equity dilution

We believe that the transaction would shore up the tier I ratio by 350-400bp. As a result, the tier I ratio would be more than 15 %, the highest in past five years. More importantly, this would be achieved without any equity dilution (our calculations suggest that if it were to achieve a 15 % tier I ratio by raising equity capital, the dilution would be more than 20 %). This will help sustain strong loan growth for next three years.

Valuation and view:

DEWH continues to capitalize on its mortgage lending expertise in an under penetrated market. We expect AUM growth to remain higher than industry average at 18-19 %+. Margins will improve further with a higher share of builder loans and lower cost of funds. Also, management 's continued focus on lowering operating cost should improve investor sentiment and lead to a re-rating. Further, the insurance deal assuages concerns about capital raise for growth. Reiterate Buy with a target price of INR405 (1.6x FY19E BV). Our estimates do not factor in capital gains.

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DHFL is shooting up 5.57% to Rs. 610 I have big lot

 

@Srouta Mukherjee
Chalo some cheer for you....

What about JB chemicals?

 

@Srouta Mukherjee , why are you becoming extinct in here?

Some more good news

The USFDA has approved sANDA application of J.B Chemicals for use of its own bulk drug for manufacture of Atenolol tablets (anti hypertensive). Sales to US to rise significantly. A Big buy.