Bet On DHFL As Housing Sector Readies To Shine

Contributing about 5 to 6 per cent of India’s Gross Domestic Product (GDP) share and capital formation, the housing sector is the second largest employment generating sector in India next to agriculture. It is perceived as the third-most impactful industry in India in terms of its effects on other industries. It directly impacts over 250 ancillary industries such as cement, steel, transport, construction, paint, brick, building materials, and consumer durables. It is expected to soon overtake other industrial sectors in terms of its GDP contribution. The housing sector in the country remains on course with double digit growth, attributed mainly to a large population base, rising income levels and rapid urbanisation. Even then the housing finance market remains relatively under-developed by global standards.

India’s housing sector has a strong growth potential in the coming decade, as it thrives upon tremendous growth opportunities linked with the country’s development cycle and socio-economic transformation. Few of these opportunities are being discussed below:

Opportunities & challenges

Population Growth

India’s population grew at a CAGR of 1.6 per cent during 2001 to 2011. Any increase in population will have a direct bearing on requirement of housing units. Increase in working population will lead to greater demand for housing. The requirement for households is likely to rise with a change in age mix, growing number of nuclear families, continuous urbanisation and growing penetration of finance.

Housing Shortage

Rapid pace of urbanisation owing to rural-urban migration is putting a strain on urban infrastructure in India and leading to substantial housing shortage. The Technical Group on Housing Shortage estimated housing shortage in urban India to be at 18.78 million by 2012, with 95 per cent shortage in the Economically Weaker Sections (EWS)/ Low Income Group segments. Besides urban areas, there is also a looming housing shortage in rural India, where approximately 68 per cent of India’s population resides. Rural housing shortage is estimated at 43.9 million in 2012 by the Working Group on Rural Housing Shortage. More than 90 per cent of this lies with the lower income and marginalised groups.

Small family, happy family

Nuclearisation refers to formation of nuclear families from joint families and is primarily driven by employment related migration. This will increase the overall number of households, thereby increasing the demand for housing units. The break-up of joint families into formation of nuclear families is largely triggering the need for new homes and benefiting the housing sector.

Rising Per Capita Income

Increase in per capita income leads to creation of increasing wealth and positively impacts disposable incomes. This results in a significant investment multiplier effect on the Indian economy, further leading to increasing consumerism and wealth creation and positively impacting savings.

Further, mortgage lending has significantly contributed to growth in housing construction and consumption activities. The Indian home loan market witnessed a 20 per cent listed growth in FY2014 with total housing credit dues at Rs 900,000 crore, as compared to 19 per cent growth in FY2013 with credit dues at Rs 750,000 crore, according to rating agency ICRA. Retail home loans reported an 18 per cent growth in FY2014, compared to 15 per cent in FY2013. Looking at the strong growth of the sector this time we will look into the financials of Dewan Housing Finance (DHFL).

About Company:

National Housing Bank (NHB)-registered Dewan Housing offers home loans to low and middle income segments in Tier II and III cities. Promoted by Wadhawan Group in 1984, it is the second largest housing finance company in India after LIC Housing Ltd. Almost 94 per cent of its total lending is to individuals (retail).

The Business:

DHFL being the second largest player in the housing finance industry is well placed to benefit from continued growth in India's mortgage market. Niche presence in tier II & III cities and stronghold in the low and middle income segments ensures lower competition for the company as this segment is undeserved and commands a higher yields compared to normal home loans because of lower ticket size.

DHFL enjoys several long‐term earnings growth drivers like strong presence in relatively less competitive tier‐II and tier‐III cities, presence across the income spectrum, widespread reach, rising average ticket size, robust asset quality and stable cost of funds etc. Further, strong domain knowledge, large customer base and increased geographical reach, expected improvement in net interest margins (NIMs) coupled with stable asset quality provides additional comfort.

In a bid to look at something beyond housing finance: DHFL has bought 50 per cent stake in DLF Pramerica Life Insurance business, a joint venture with US‐ based Prudential Financial, a leading multinational in the life insurance business in FY2014. During the quarter, DHFL has also got the government approval to start Mutual Fund business. These initiatives will be synergistic with existing business of DHFL and will lead to increase in other income for the company. Also, it has applied for small finance bank license for which the approval is awaited.

The company also launched a product Wealth2Health, an innovative deposit product with liquidity to meet medical emergency. It offers a host of health related features & benefits to the customer apart from good returns. It functions like a normal deposit when the customer is well, but when the customer is unwell, it works like a health fund and pays for health related expenses.

The company has established a track record of raising capital (both equity and debt) at regular intervals to fund business growth. The company continues to have comfortable capitalization levels. Recently company said that it will raise Rs 125 crore through private placement of debentures. The company said the proposed fund raising is an upward revision of its earlier plan of Rs 25 crore.

With this the recent government initiatives will also help the company to foray into the housing finance segment.

Government Initiatives

The central government has been at the forefront in pushing India’s housing sector. Many new initiatives and policies have been introduced, specifically focussed on lending for housing. Some of the highlights in last year were to bring housing loans of up to Rs 50 lakh under Affordable Housing and bringing housing loans up to Rs 28 lakh in urban and Rs 25 lakh in other centres under priority sector lending. The government also relaxed foreign direct investment (FDI) norms in construction and housing sector as well as easing exit norms for global investors.

The government is committed towards ‘Housing for All by 2022,’ involving construction of 2 crores houses in urban India and 4 crores houses in rural India. During FY2014, projects for building 15.69 lakh houses and dwelling units for economically weaker and lower income portion of the population got sanctioned by the National Housing Bank (NHB).

Further, the recently passed Real Estate Bill in Parliament will also help the housing finance sector as the move will cheer homebuyers and developers alike. The Real Estate Bill will give the confidence to the buyers as the Bill will regulate the whole process from starting the construction to allocating the house after completion. Further it will also increase the restriction on developers. This increased confidence in system will also provide boost to housing finance as the demand for loan will increase with demand for house.

The government’s initiatives with good positioning of DHFL into the industry will place DHFL into the sweet spot in near future.

Financials:

Financially, DHFL has been facing positive growth with revenue increasing by compounded annual growth rate (CAGR) of 32.77 per cent over the period of five years. During the same period company’s EBITDA (earnings before interest, depreciation and amortization) increased by CAGR of 32.72 per cent. Financing cost witnessed a CAGR of 35.59 per cent in last 5 years. Profit after Tax (PAT) too witnessed a CAGR of 18.57 per cent in the last five years.

The interest income of company stood at Rs 5716 crores in FY15 compared to Rs 4670 crores same period last year an increase of 22.39 per cent YoY. The interest expenses stood at Rs 4460 crores compared to Rs 3783 crores in FY14 an increase of 17.90 per cent YoY. The net interest income (NII) stood at Rs 1256 crores this year compared to Rs 888 crores in FY14 an increase of 41.51 per cent YoY. The net interest margin stood at 2.89 per cent for FY15. The capital adequacy ratio which considers ratio of bank's capital to its risk stood at 16.56 per cent. The Gross and Net non performing assets (NPA’s) of company stood at 1 and 0.7 per cent respectively. The Asset under Management (AUM) of company stood at Rs 56,884 crores against Rs 44,676 crores in the previous financial year.

The company’s total revenue from operations for FY15 increased by 20.36 per cent and reached to Rs 5979 crore from Rs 4968 crores in the previous fiscal. EBITDA increased to Rs 5428 crore from Rs 4529 crore, representing a growth of 20 per cent year on year (YoY). The EBITDA margin stood at 90.75 per cent for FY15 compared to 91.12 per cent same period last year. The net profit of the company stood at Rs 621 crores compared to Rs 529 crores in FY14, an increase of 17.45 per cent YoY. The net profit margin stood at 10.39 per cent in FY15 compared to 10.64 per cent same period last year.

The total debt of the company for FY15 stood at Rs 40526 crores compared to Rs 33890 crores in FY14 an increase of 19.58 per cent YoY. The total debt was 74.17 per cent of total assets in FY15 compared to 77.27 per cent same period last year.

On quarterly basis, the company’s net revenue from operations reached Rs 1885 crores in Q3FY16 compared to Rs 1527 crores in Q3FY15 an increase of 23.5 per cent YoY. The EBITDA stood at Rs 1707 crores this quarter compared to Rs 1383 crores in Q3FY15, an increase of 23.39 per cent YoY. The EBITDA margin stood at 90.54 per cent compared to 90.62 per cent same period last year. The net profit for the quarter stood at 186 crores compared to Rs 160 crores same period last year, an increase of 16.43 per cent YoY. The net profit margin stood at 9.86 per cent this quarter compared to 10.46 per cent in Q3FY15.

The NII this quarter stood at Rs 426 crores compared to Rs 354 crores in Q3FY15 an increase of 20 per cent YoY. The net interest margin (NIM) is at 2.9 per cent compared to 2.8 per cent same period last year. The gross NPA’s are at 0.84 per cent this quarter compared to 0.77 per cent same period last year.

The outstanding loans portfolio stood at Rs 59 crores this quarter compared to 48 crores in Q3FY15 an increase of 23 per cent YoY. The disbursements stood at Rs 6.4 cores compared to 5 crores same period last year an increase of 31 per cent YoY.   

The company’s credit rating was also upgraded to the highest order of rating ‘CARE AAA’ (Triple A) by CARE in FY15. The borrowing profile of DHFL consists of 61.4 per cent from Banks and Multilateral Agencies, 28 per cent from capital market and 10.60 per cent from Fixed Deposit and National Housing Bank combined.

On valuation basis the stock of the company is trading at trailing twelve month (TTM) P/E of 7.73 compared to industry P/E of 26.11. The EPS for FY15 stood at Rs 47.19 compared to Rs 41.11 same period last year.

In last one year, LIC Housing, HDFC, Indiabulls Housing, Dewan Housing have grown their assets faster than the banking system as demand from smaller cities more than offset the slowdown in metros. In the past year, shares of these companies have rewarded investors with an average of 25 per cent, beating the broader indices by a wide margin.

Conclusion

The recent initiatives by the union government will help the housing sector in the near future. Supported by grip in business growth, steady NIMs and strong asset quality of DHFL, the expectations of core earnings growth is strong in near future.
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Harshil Mehta, CEO of DHFL spoke to Mayuresh Deshmukh on the road ahead

How the recent initiatives by government for real estate and housing sector can help the housing finance industry as a whole?

Recent initiatives by the Government to boost real estate sector bodes well for the housing finance industry as well. The vision to ensure “Housing for All by 2022” is a step towards creating an enabling and supportive environment for expanding credit flow and increasing home ownership. This will help create an ecosystem of opportunities for the potential home buyer as well as housing finance companies like DHFL which is at the forefront in catering to the financial needs of the under-banked masses in the semi-urban areas through our strong linkages with these segments.  Government decision to develop 100 smart cities is also likely to boost demand for the affordable housing segment which will generate demand for home loans. Budget provisions like tax sops to individual borrowers for home loan interest and principal payments, inclusion of housing loans up to Rs 50 lakh under affordable housing and placement of home loans up to Rs 28 lakh in urban and 25 lakh in other centres under Priority/sector lending are other key initiatives that will encourage people to opt for home loans.

DHFL has forayed into the Life insurance business and now you got approval for Mutual Fund business, so how these initiatives will create synergies for the company in coming future?

At DHFL, we are committed to the cause of financial inclusion by broadening the range of products and services available to customers across India, especially in Tier 2 and Tier 3 cities/towns. We see great synergy in this tie-up with Pramerica Life Insurance and Pramerica Asset Managers as this will help us emerge as a one stop shop for our customer’s financial needs, extending beyond home loans. The JV Life Insurance and Mutual Fund Company will benefit from the strong nationwide distribution network of DHFL. Both businesses (life insurance and asset management) will also benefit from the legacy and expertise of a 138-year old financial institution like Prudential Financial, Inc. (PFI), and DHFL’s strong knowledge of the Indian retail financial services market will add to creating significant long-term value for shareholders.

What are your views on the FY17 numbers? Are you confident enough to sustain the level of growth witnessed in the previous fiscal?

DHFL registered a 23.48% growth in its Assets under Management (AUM) year-on-year to Rs 65,962 crore up from Rs 52,637 crore as on December 31, 2014. The company has diversified into the SME lending segment last year as part of the strategy to grow our AUM and further leverage the SME customer base to grow our home loan business. Our SME lending business currently stands at Rs 1,200 crore contributing 2% to the AUM. We intend to grow this vertical at 25-30% year-on-year.