DHFL's mid-size bet pays off

HDFC and some of the country’s larger banks dominate the mortgage industry in India. In such a scenario, a relatively smaller player – Dewan Housing Finance ( DHFL) – has managed to make steady progress in this segment over the last few years. The stock market has recognised the company’s success.

Since the rally started a year ago, the private housing finance firm’s stock price has risen by more than three times, while the benchmark Nifty has roughly doubled.

DHFL has managed to create a niche segment by financing housing loans for middle and low-income customers, as its average ticket size is Rs 8 lakh, which is much lower than the other two players in the mortgage industry – HDFC and LIC Housing Finance.

At a time when the entire industry was focusing on low-cost housing, DHFL gained a lot of mileage due to its expertise and operational experience in that segment. This helped DHFL in growing its profit by close to 68% in the first nine months of this fiscal year, a rate which was higher than that of HDFC and LIC Housing Finance.

Such a high growth in profit was backed by an around 80% growth in disbursements. The even more impressive aspect of the performance is that the company’s growth did not come at the cost of its asset quality. Its net non-performing assets or bad loans formed less than 1% of its advances at the end of December 2009 quarter. Its asset quality is comparable to its larger peers in the industry.

DHFL’s net interest margin (NIM) was 2.95% in the December 2009 quarter. At current levels, the
company’s NIM is higher compared to its peers. However, DHFL lags its peers when it comes to return on assets (RoA). Its RoA was 1.7% in

FY09, while that of HDFC and LIC Housing Finance stood at 2.3% and 2.2%, respectively. DHFL’s stock is trading at around 2.2 times its book value. In comparison, LIC Housing Finance is trading at a price-to-book value ratio of 2.6, while HDFC is trading at 5.8 times its book value.

There is a wide margin between the valuations of these players, which is owing to their size and the track record. Considering that DHFL’s stock has already appreciated significantly, further gains will depend on the company’s ability to maintain its growth momentum.