Buy Dewan Housing Finance; target of Rs 374: Edelweiss

Dewan Housing Finance’s (DHFL) Q3FY17 PAT, at INR 2.45bn (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’.

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 INR 374.