Dewan Housing Finance Limited
Dewan Housing Finance Limited
Dewan Housing Finance Limited
LIMITED
2 DEWAN HOUSING RESEARCH REPORT
Research Report_______________________
Dewan Housing Finance Ltd. (DHFL) was established in 1984 by Late Shri
Rajesh Kumar Wadhawan to enable access to affordable housing finance to
the lower and middle income groups in semi-urban and rural parts of India. Quick Stats
Since its inception the company has grown stronger and has become the
second largest housing finance company in the private sector. DHFL has an NSE CODE 511072
extensive network of 349 offices and an outstanding loan book of Rs 618 bn
at the end of FY16. It also has tie-ups with leading private sector banks CMP 324
namely United Bank of India, Dhanlaxmi Bank and YES bank to provide home
loans to customers sourced by them through a home loan syndication MARKET CAP 313
agreement. DHFL has also set up representative offices in London and Dubai
to serve the ever increasing NRI population in these regions.
BOOK VALUE 172
Investment Rationale
52 WEEK HIGH 325.25
Healthy growth in loan book
Increased funding through NCDs to reduce cost of funds 52 WEEK LOW 140.55
Higher share of non-housing loans to aid margin expansion
Government initiatives to boost housing growth
Robust credit appraisal process leading to stable asset quality
SHAREHOLDING
Concerns PATTERN %
Slowdown in real estate sector Promoters 39.31%
Regulatory changes
Rising competition from banks and peer companies Institutions 33.37%
Asset quality might worsen
Non Institutions 27.32%
Property investment could dilute returns
Auditors not from top tier firms
Total 100.00%
Company Overview
Dewan Housing Finance Ltd. (DHFL) was established in 1984 by Late Shri Rajesh Kumar Wadhawan to enable access to affordable
housing finance to the lower and middle income groups in semi-urban and rural parts of India. Since its inception the company has
grown stronger and has become the second largest housing finance company in the private sector. DHFL has an extensive network
of 349 offices and an outstanding loan book of Rs 618 bn at the end of FY16. It also has tie-ups with leading private sector banks
namely United Bank of India, Dhanlaxmi Bank and YES bank to provide home loans to customers sourced by them through a home
loan syndication agreement. DHFL has also set up representative offices in London and Dubai to serve the ever increasing NRI
population in these regions. DHFL has a wholly owned subsidiary viz. DHFL Advisory and Investments Pvt. Ltd. It has an existing joint
venture agreement with Prudential Financial, Inc. and holds 50% equity stake in DHFL Pramerica Life Insurance Co. Pvt. Ltd. (DPLI). It
has also entered into a joint venture with PGLH of Delaware, Inc. and holds 50% stake (includes the investment made through its
WOS) in each of DHFL Pramerica Asset Managers Pvt. Ltd. and DHFL Pramerica Trustees Pvt. Ltd. DHFL alongwith promoter group
entity Wadhawan Housing Pvt. Ltd. and Caledonia Investments Plc. (UK) acquired a 100% equity stake in First Blue Home Finance
Ltd. (erstwhile Deutsche Postbank Home Finance Ltd.) in Dec-2010 which helped significantly grow the loan book. DHFL acquired
67.56% equity in First Blue through a SPV company called DHFL Holdings Pvt. Ltd. (100% subsidiary company). Both the subsidiaries
were amalgamated with the company in Jan-2013. DHFL has a strong pan-India presence with a network of 182 branches, 146
service centres, 18 circles/clusters, two disbursement hubs, and one collection centre in India. Additionally, DHFL has its corporate
and national offices in Mumbai and overseas representative offices in London and Dubai.
DHFL entered into a JV with Prudential Financial Inc. and acquired 50% equity stake in DHFL Pramerica Life Insurance Co. Ltd.,
(erstwhile DLF Pramerica Life Insurance Co. Ltd.) Through this joint venture, DHFL provides insurance services leveraging on its pan-
India distribution network. Prudential holds 26% in the company with the balance being held by DHFL group companies (DHFL holds
50%). The company had an AUM of ~Rs 2100 cr at the end of FY16 and profit of Rs 50.8 cr.
In FY15 DHFL entered into agreement with PGLH of Delaware Inc. an indirect wholly owned subsidiary of Prudential Financial, Inc.
and post receipt of regulatory approvals in FY16 acquired a 50% equity stake in each of DHFL Pramerica Asset Managers Private
Limited (DPAMPL, erstwhile Pramerica Asset Managers Private Limited), DHFL Pramerica Trustees Private Limited (DPTPL, erstwhile
Pramerica Trustees Private Limited), respectively. In FY16 DPAMPL acquired the asset Management Company and Trustee Company
of Deutsche Mutual Fund (DBMF) and Deutsche India Holdings Private Limited, sponsor of DBMF, thus enhancing its assets under
management. At the end of FY16, the company had an AUM of over Rs 20,000 cr comprising of ~Rs 18,500 cr under mutual funds
and ~Rs 2,000 cr of PMS.
The company was started by Vysya Bank Ltd and known as ING Vysya Ltd with majority shareholding of 85%. DHFL along with its
promoter group bought majority stake in the company in 2003 and currently hold 94.8%, with DHFL holding 9.47%, Wadhawan
Global Capital Pvt. Ltd. holding 83.89%, the balance being held by ICICI Bank Ltd., and a few with the Industrialist and Public. It has a
network of 41 branches and 21 service centres. As on FY16, the company made home loan disbursements of Rs 442 cr.
Aadhar Housing Finance Ltd. (AHFL) is promoted by DHFL group with equity participation from International Finance Corporation
(IFC). Wadhawan Global Capital Pvt. Ltd. Holds 62% in the company, IFC has 20% stake and DHFL owns 14.9%. AHFL has a presence
across 117 locations across 13 states. It disbursed loans of Rs 523 cr in FY15 and had an outstanding loan book of Rs 975 cr and a
customer base of 18000. Aadhar Housing Finance Pvt. Ltd. and DHFL Vysya Housing Finance Ltd are likely to be merged with each
other subject to regulatory approvals.
DHFL group forayed into educational loans business through Avanse Financial Services in FY14. Avanse provides financial assistance
through Avanse standalone offices and also through the DHFL network offices mainly to students travelling to all key international
advanced education destinations including US, UK, Australia etc. Besides DHFL, International Finance Corporation (IFC), holds 20%
equity stake in Avanse. At the end of FY16 it had an outstanding portfolio of Rs 530 cr.
Investment Rationale
DHFL has witnessed strong traction in its loan book which has grown at CAGR of 34% over FY11-FY16 to ~Rs 62000 cr backed by
higher geographical penetration and increasing ticket size. The average ticket size has grown at CAGR of 16% during the same period
to Rs 12.4 lakh. We expect the company to grow its loan book by 21% CAGR over FY16-FY18 driven by increase in ticket size and
higher demand for affordable housing due to the government initiatives. Sanctions and disbursements have also grown at a strong
pace of over 30% CAGR during FY11-FY16. Amount sanctioned have grown at 33.3% CAGR. However due to the slowdown in the real
estate sector disbursements grew at a slower pace of 30% CAGR.
DHFL has been reducing its dependence on bank borrowings and increasing its reliance on capital markets i.e. NCDs to fund its
growth requirements as it can raise NCDs at a lower cost as compared to bank borrowings. This has resulted in its average cost of
funds falling by more than 100 bps from 10.85% in FY12 to 9.67% in FY16. Share of bank loans in the funding mix have fallen from
70% in FY12 to 44% at the end of Q2FY17. At the same time share of capital market borrowings has increased from 18% to 33%.
DHFL intends to further reduce bank borrowing to 30-35% of the total borrowings over the next couple of years and bring down its
average cost of funds by a further ~100 bps. It has already raised Rs 14,000 cr in the month of Aug-Sep 2016 through two tranches of
NCDs which were heavily oversubscribed. It intends to utilize the part of the proceeds for business growth and the balance to retire
high cost bank borrowings. Over the last 6 years capital market borrowings have been cheaper by ~100 bps on an average as
compared to bank borrowings. Although the gap contracted to 82 bps in FY16 capital market borrowing were still significantly
cheaper than banks. DHFL enjoys the highest credit rating of AAA by CARE which helps the company to avail loans at the most
competitive rates. As the company has already raised a significant amount of funding, it might not require to borrow any substantial
amount through banks.
DHFL offers a range of home-related loans to customers depending on their demand and needs. It launched the SME funding
vertical in FY15 with the strategic intent of enabling financial inclusion for the micro, small and medium enterprises (MSMEs). It was
already offering LAP and Project loans, the quantum of which has gone up in recent years. Share of high yielding non-housing loans
has increased to 28% of the loan book in FY16 as compared to 18% in FY12. Non-housing loans would support the core business of
the company and also help to maintain margins in the competitive scenario.
Housing sector contributes 5-6% to the country’s GDP and has witnessed steady growth driven by demographic factors and a
continuing housing shortfall. Government initiatives like ‘Housing for All’ by 2022 and ‘Smart city projects’ would further drive
demand for housing. Recently the government decided to construct 2.95 cr houses in rural areas under its ambitious Housing for All
by 2022 scheme spending nearly Rs 81,975 cr over construction of the one cr houses in the first three years of the Pradhan Mantri
Awaas Yojana-Gramin under which it will provide financial assistance of Rs 1.20 lakh to those living in plain areas and Rs 1.30 lakh to
those in "hilly and difficult" areas. The inclusion of housing loans of up to Rs 50 lakh under affordable housing in six main cities and
Rs 40 lakh in other cities and bringing loans up to Rs 28 lakh in metros and Rs 20 lakh in other centres under priority sector lending
would boost the activities of HFC. The decision of the RBI to increase loan-to-value (LTV) ratio to 90% for loans up to Rs 30 lakh is
another positive step, which will enable housing finance companies to lend more to Lower Middle Income customers where DHFL
has a strong foothold. The Indian government’s move to spend $15.3 billion for smart cities will have a strong positive impact on the
real estate sector, as developers will be able to offer new projects in the upcoming cities boosting the social, economical
infrastructure in the region and create new jobs. The will allocate enough land and housing for low income groups (LIGs) and
economically weaker groups (EWGs), thereby increasing the demand for realty in the country.
Industry Overview
Low mortgage penetration In India, mortgage to GDP ratio stands at 9% well below the developed economies like US and UK
mortgage to GDP ratio of 81% and 88% respectively. Even certain emerging economies such as Thailand (17%) and China (20%) have
a far higher mortgage ratio as compared to India. This lower mortgage penetration implies huge opportunity for growth going
forward. As per BCG/IBA report, the estimated outstanding mortgage in India is set to increase by 8 fold by 2022 to cross nearly 20%
of India's GDP.
Census 2011 figures reveal that the housing stock has increased form 24.9 crore in 2001 to 33.1 crore in 2011, indicating a growth of
33 per cent. However, housing shortage is posing a challenge, since there is a mismatch between the people for whom the houses
are being built and those who need them. As per the estimated housing shortage for 2012-17, urban area have about 95% shortage
in economically weaker sections and lower income group categories, whereas rural areas have about 90% shortage in below poverty
line category. The trend of migration from rural to urban is likely to continue. India’s urban population has grown at a CAGR of 2.8%
over 2001-2011, resulting in an increase in the urbanization rate from 28% to 31.1%. The rising population in urban has created huge
shortage of urban housing in India. According to Ministry of Housing and Urban poverty alleviation (MHUPA), of the total urban
housing shortage, 80% (14.99 mn) of these households are living in congested houses requiring new houses. Thus large shortage of
urban and rural housing offers immense growth opportunity going ahead. According to a survey by UN State of the World
Population report in 2007, by 2030, 40.76% of country's population is expected to reside in urban areas.
Concerns
Slowdown in real estate sector Over the last 2-3 years, housing sector has seen an inventory pile up situation in India and launching
of new projects has come down in the past one and half year. A number of houses, flats and apartments are being sold without
getting booked. However, slowdown in demand for loan has been reported in the high end segments, which are driven by
investment demand. Regulatory changes Regulatory changes like increase in risk weights for a certain category, cap on interest rates
under refinance could mar the growth and profitability of the company. Rising competition from banks and peer companies There is
strong competition from banks and peer companies in the housing finance industry as it is considered relatively lower risk loan.
Higher competition might result in lower yields going forward. Asset quality might worsen Although the asset quality has largely
remained stable, high proportion of LAP loans to self-employed category where income is volatile could result in defaults leading to
higher provisioning requirements. The company has also increased project finance loans which could turn into NPAs in the event of
slowdown. Property investment DHFL was constructing a building for which it has incurred a capex of ~Rs 750 cr (shown under
CWIP). It received ~Rs 250 cr from the builder in FY16 as the project was scaled down due to want of FSI. The company has now
cancelled the lease with the builder and expects to receive the outstanding amount by the end of the year. However, this would
block capital in the short term till the time the amount is realized. Auditors not from top tier firms The auditors of the company are
not from amongst the top auditing firms due to which some investors may not have full comfort with the financial statements.