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(Financial knowledge for dream life)

Blog - Stock Tips

Long term stock tips - 7 (DEWAN HOUSING FINANCE)

Posted by SRIKANTHBABU KALIKI on November 6, 2010 at 7:17 PM


Current price: Rs. 315.00 (05/11/2010)

Recommendation : BUY in Dips


Market Cap 3270.88    EPS (TTM) 21.76     P/E 14.43     P/C 14.26

Book Value 85.70   Price/Book 3.66    Div(%) 30.00%   Div Yield(%) 0.96

Market Lot 1.00     Face Value 10.00     Industry P/E 33.13

Low valuations, strong earnings growth potential, good asset quality, improved provision coverage and high proportion of floating rate loans are key positives.


Fresh investments with a more-than-two-year-horizon can be considered in the stock of Dewan Housing Finance, a non-banking finance company that extends loans predominantly to lower and middle-income groups and has presence in Tier-II and Tier-III cities.


Sustained housing demand in Dewan Housing's target markets, in addition to rising income levels, may continue to drive business growth for the company. Strong capital adequacy will help the company to grow its loan book and post strong earnings.


Dewan Housing's plan to acquire a Pan-India presence would not only open new doors of opportunity but also will allow geographical diversification of its loan book.

The company, focussed mainly on western and some parts of South India, has tied up with Punjab and Sind bank and United Bank of India to expand its presence.


At current price of Rs 315, the stock is trading at 1.8 times its estimated FY12 book value and is discounting its estimated FY12 earnings 10 times.


This places it at a discount to bigger housing finance companies such as HDFC, LIC Housing and also to similar sized Gruh Finance.


Given the relatively small size of the loan book and demand for housing loans, Dewan Housing may command higher price-to-book valuations.


In addition to low valuations and strong earnings growth potential, good asset quality thanks to secured nature of lending, improved provision coverage and high proportion of floating rate loans (reducing interest rate risk) are the other key positives. Dewan Housing currently operates from 354 locations (inclusive of tie-ups with United Bank of India, Central Bank of India and Punjab and Sind Bank).


It uses a hub-and-spoke model where loans are originated at branch offices and appraisal is at a central processing centre, which leads to standardised procedures on assessing credit quality.

The loan book of Dewan Housing grew at a 38.4 per cent compounded annual growth during the period FY2007-10. Even during the slowdown year (FY08 ) when most banks saw a reduction in their home loan portfolio, Dewan Housing's loan book grew at 26 per cent.


The September-end average loan-to-value of current portfolios is 68 per cent and instalment-income ratio of borrowers is 38.5 per cent in FY10. This indicates the margin of safety on the loans. The average ticket size is 5.06 lakh and tenor 12 years.


Retail focus


Dewan Housing has benefited from its concentration on the retail loan segment compared with commercial real-estate loans, which became bad during the credit crisis. As of September 2010, only 5 per cent of the total loan book was commercial loans.


With the Eleventh Plan projecting a 24.7 million unit shortfall in housing units (99 per cent of this number is in low and middle-income group suggesting growth potential for the company).


To support this growth, it recently raised Rs 375 crore through a QIP, improving its capital adequacy ratio (latest CAR is 21.8 per cent) against the mandated 15 per cent. This would allow it to maintain a strong loan book growth of more than 35 per cent without raising any capital for the next two years.


Dependence on bank loans


On the liability side, the current borrowing profile is skewed towards bank borrowings, which form 66 per cent of the portfolio.


Dewan Housing intends to broad-base its resource base by floating more debentures (given its investment graded credit rating) and loans from multilateral agencies while reducing the dependence on bank borrowing.


The net profits of Dewan Housing grew by 46 per cent annualised during the period FY07-10. For the first half of FY11, the net profit grew by 59 per cent as the margins improve in addition to disbursement growth of 67 per cent.


Margins were also sustained at 3.05 per cent which may continue despite rising interest rates as the cost of borrowings can be passed on to customers. Almost 88 per cent of the loans as of September 2010 were floating rate loans.


With reduction in cost of funds by broad-basing of resources into NCDs and access to ECBs, the margins may further improve. Fee income may also lead to steady revenues from sale of insurance and other advisory services in addition to rising processing fee.


Despite such strong growth in advance book, the gross non-performing asset (NPA) ratio was contained, it currently stands at 1.07 per cent as against 1.16 per cent at the end of FY10.


The net NPA ratio also improved to 0.41 per cent as Dewan Housing used profit from sale of investments in HDIL to improve the provision coverage.


The aforementioned loan-to-value will also protect the asset book to some extent in absence of any systemic slowdown. The risk of banks penetrating into the segments Dewan Housing is present in is mitigated by quicker processing done by Dewan Housing.




Note: "Rupee dreams blog" brings to it's readers the most suitable recommendations Long term investment by short listing different Recommendations given in other Sources.



(Please take your own decision before investing or trading in stocks or take advise from your financial adviser. Trading in stock market is very risky. Please analyze yourself what is your risk profile. This blog is not an advisory service to buy or sell. The contents of “this blog” are only for educational purposes. )


Wish you happy investment,


Categories: Stock Tips - Long term

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1 Comment

Reply MichelHerbert
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