Tuesday, May 12, 2015

Dewan Housing Finance (DHFL) - Used to be cheap and probably still decent quality

My notes on DHFL - Dewan Housing Finance Limited from Feb-Mar-Apr 2014. The company continues to have some good shareholders like Rakesh Jhunjhunwala and the government of singapore. The LTV is falling and the NPAs are up a bit but not very much. The company still claims they have excess provisioning. I wonder why Mr. Market has been reducing his bid on the stock all the way from 552 to 431. 

Disclosure: I am long.


Value Canvas

Founded in 1984 Dewan Housing (DHFL) is the second largest independent housing finance company in India after HDFC. HDIL was part of the same family and through the succession planning process the groups split in 2011. The company has grown at a rapid clip.
1. How good is the moat?
Grade B Moat
  • Dewan is a housing lender where the barrier to entry for mid sized company is low, product replication is easy, and the cheapest provider wins
  • Brand doesn't really exists on a large scale
  • Performance during recessions - overall the performance during a real estate bubble bust would be a huge concern but in the current scenario this should not a a big problem
  • Cost of funds is very high - 90bps to a full 1% over HDFC which needs to be brought down.
2. Risks
  •  The biggest risk I see here is that promoters own less than 50% which is unusual for this kind of a company. Also at this valuation the company and the promoters should be buying stock rapidly
  • The company is routine engaged in selling securitized loans
  • The company has bought out DLF's stake in DLF Primerica - a life insurance business that this company knows nothing about. This is also an opportunity.
3. Financials
  • Gross NPAs stand at 0.9% but the NPA coverage is excellent at 90%+
  • FX exposure is minimal
  • Stock options dilution annually is around 0.4%
  • Capital adequacy ratio stands at 17.48% at the end of Dec 2013
  • Debt to equity is fairly aggressive at 9.68 at the end of Dec 2013
  • Profit per employee is around 26 lakhs which is excellent relative to the banks but not HDFC. But HDFC relies on its subsidiary to do some of the labor intensive work
  • Average compensation per employee is 8.1 Lakhs which is higher than HDFC Bank or Axis Bank
  • Average ticket size of each loan is rapidly rising and is 10.49 Lakhs up from 5.88 Lakhs in FY 2011
  • Subsidiaries have either been merged or divested. As of Dec 2013 I think the only subsidiary is the Primerca life insurance JV.
4. Soft factors
  •  Rakesh Jhunjhunwala owns 4.29% of the company. He put on the position between Oct and Dec 2013 from the quarterly updates from the company.
  • Caledonia, a UK investment trust, is a long term investor in the company
  • Promoters have increased their stake from 35.2% in Dec 2012 to 39.28% in Dec 2013
  • I don't understand why the company is not doing a buyback - other than the fact that the need the capital due to the high gearing.
5. Pricing
  • The company is trading at P/E of 4.89 Times and a P/B of 0.8. Even if the earnings grow at a 5% CAGR you will still make your returns. Ofcourse if the earnings fall then there is possibility of losing money.
  • With what I see on this the downside is lesser and less likely than the upside and it is a good value investment.

BSE: 511072|NSE: DHFL|ISIN: INE202B01012


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