Dewan Housing Finance Research Report By Edelweiss

Dewan Housing Finance’s (DHFL) Q3FY17 PAT, at INR2.45bn (up 32% YoY), was marginally better than our estimates owing to better NIMs (broadly stable QoQ versus expectation of decline). Disbursements’ growth was soft, up ~10% YoY versus historical trend of >25% YoY growth, however demonetisation impact was lower than envisaged (we had expected lower single-digit YoY growth), feeding into AUM growth of 18.7% YoY/4% QoQ. Asset quality was stable with GNPLs contained below <1%. Cost/income ratio, a key monitorable, was also broadly stable with opex growth curtailed at 9% YoY. Valuation at 1.3x FY19E P/ABV is inexpensive for RoE of 16% plus. Maintain ‘BUY’. Disbursements soft, demonetisation impact milder than envisaged

Disbursements, despite challenging times, registered 10% YoY/6.8% QoQ growth (we anticipated lower single-digit YoY growth). After minor blip in November 2016 (post demonetisation), management highlighted that the trend in December has been closer to normalised trend (pre-demonetisation) which supported overall growth during the quarter. Consequently, AUM growth stood at >18% YoY, though retail grew by mere 10.5% YoY (moderating from higher teens growth earlier), thus taking its proportion down to 69% (72%, as at end FY16). Meanwhile, proportion of project finance rose to 12.5% (11.5% in Q2FY17), with management targeting higher proportion at 15%, which is a key monitorable. Share of SME & LAP remained broadly stable at 18-19%.

Cost-to-income ratio stable, sustenance key

High cost structure, C/I ratio (calc.) at ~26% vs. peers’ average of mid teens, has been a key concern. However, DHFL’s focus on productivity has seen it improving in past year or so (~26.4% versus 31.8% in Q4FY16). While cost reduction seems to be on track led by improving efficiencies and technology initiatives, sustenance of same is vital.

Outlook and valuations: Attractive operating space; maintain ‘BUY’

DHFL is bound to be key beneficiary of government’s initiative to promote affordable housing, given its presence in tier II/III cities and lower ticket size. However, in view of rising proportion of developer loans, we are building in higher NPLs going forward. The company has the potential to deliver ~20% earnings CAGR over FY16-19E with RoE of 16%. Juxtaposing this with inexpensive valuation (1.3x FY19E P/ABV) renders favourable risk-reward. We maintain ‘BUY/SO’ with a target price of INR374.