CRISIL maintains valuation grade of 5/5 to Dewan Housing

Dewan Housing Finance Corporation Ltd’s (Dewan Housing’s) Q1FY13 earnings were below CRISIL Research’s expectations due to higher provisions though it performed better on the loan book front. Consolidated loan book grew 9% q-o-q to Rs 278 bn. We reduce earnings estimates to factor in higher provisions. We retain the fundamental grade of 4/5. However, increasing concerns about asset quality due to a challenging economic environment and rising contribution from high risk project loans exert pressure on our fundamental grade.

Despite competitive pressure on mortgage yields, NIM stable with rise in share of highyielding project loans and loans against property

• Standalone loans grew 10% q-o-q (up 40% y-o-y) to Rs 214 bn with 81.6% contribution from mortgage loans. Project and commercial loans (non-mortgage loans), up 16% and 14% q-o-q respectively, grew faster than mortgage loans, which grew 9% q-o-q to Rs 175 bn.
• Net interest income grew 11.8% q-o-q driven by 10% growth in loan book with stable NIM of 2.81%. Despite competitive pressure on Dewan Housing’s mortgage loan yields, NIM was stable because borrowing costs fell 13 bps and share of high-yielding non-mortgage loans grew (18.4% in Q1FY13 compared to 17.7% in Q4FY12). Non-interest income was up a mere 1.2% q-o-q to Rs 433 mn as third party distribution fees fell due to seasonality.
• Due to strong loan book growth, capital adequacy ratio fell 60 bps q-o-q to 17.6%, yet remained well capitalised above the 12% norm.

• Cost to income fell to 36% compared to 47% in Q4FY12 as operational costs declined 16.6% q-o-q to Rs 672 mn due to higher staff costs (bonus-related), and higher advertisement and legal expenses, last quarter. Other expenses as % of costs fell 203 bps q-o-q to 58%.

• Provisions and contingencies grew to Rs 150 mn compared to negative provisions of Rs 62 mn in Q4FY12 as absolute gross NPAs grew 34% q-o-q to Rs 2 bn. Gross NPAs increased to 0.92% in Q1FY13 from 0.76% in Q4FY12.
• The company is gradually increasing its exposure to project loans. The management guided that share of project loans (6% of total loans) will rise up to 10% in the next two years. We believe that project loans is a high-yield high-risk segment, hence, its ability to manage this book will be a monitorable.
• Adjusted PAT (adjusted for income from divestment of stake in subsidiary companies in Q4FY12) grew by 19.5% q-o-q to Rs 779 mn.

Earnings estimates lowered; fair value revised to Rs 276
Following reduction in earnings estimates and lowering of P/B multiple to 1.3x (erstwhile1.4x) on FY14E adjusted book value to Dewan Housing, our fair value is revised to Rs 276 per share from Rs 307. At the current market price of Rs 160, our valuation grade is 5/5.

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