Dewan Housing: Loan book growth drives profitability

Dewan Housing's Q3FY13 results were broadly in line with CRISIL Research's expectations. Consolidated book grew 5% q-o-q to Rs 310 bn. Standalone PAT grew 6.3% q-o-q to Rs 912 mn. Due to the challenging economic environment, the company witnessed asset quality pressures but it fully provided for default loans, leading to nil net NPAs (non-performing assets). We retain the fundamental grade of 4/5.

Loan book growth leads to higher processing fees and boosts operating income
Standalone book grew 4.7% q-o-q (up 31% y-o-y) to Rs 243 bn with 84% contribution from mortgage book (up 8% q-o-q to Rs 205 bn). Project loans increased 5% q-o-q while loans against property (LAP) declined 21% q-o-q. The company is well capitalised with a capital adequacy ratio of 16.5% and tier I capital of 11.5%.

Net interest income grew 4.6% q-o-q led by loan book growth and stable NIM of 2.87%.
NIM is stable as yields were intact q-o-q (despite yield pressure on prepayments) and borrowing cost was flat at 10.7%. Although third party distribution fees were muted, noninterest income increased 10.7% q-o-q to Rs 576 mn led by growth in processing fees.

Prepayment pressure and competition up in home loans
Though standalone disbursements were up 22% to Rs 30 mn, standalone loans grew 4.7% due to higher repayments / prepayments. To arrest prepayments, the company has faced yield pressure. Standalone sanctions grew 20% q-o-q to Rs 39 mn as expected.

Our channel checks suggest that competition in home loans has intensified from banks
as their corporate book is drying up and their focus is shifting to secured loans (page 4). Hence, we forecast yield pressure in our estimates for Dewan Housing. Its ability to combat competition will be a monitorable.

Fully provided for default loans, resulting in nil net NPAs
Dewan Housing has provision coverage ratio of 112% but it made provisions of Rs 150 mn (flat q-o-q) - higher than mandatory as a prudent provision measure. Conservative loan-to-cost of 65.5% and low instalment-to-income of 42% cushions against defaults. As a percentage of loan book, gross NPAs grew to 0.73% from 0.69% in Q2 in a challenging environment. Gross NPAs grew 11% q-o-q to Rs 1.8 bn but net NPAs were nil as gross NPAs are fully provided for.

First Blue Home Finance to get merged as courts give approval
Dewan Housing has received the approval for merger with First Blue from Mumbai and Delhi courts. First Blue's book grew 4.2% q-o-q to Rs 67 bn with stable asset quality (gross NPAs flat q-o-q at 0.8%). It reported RoE of 19.4% and RoA of 1.85% in 9MFY13.

Fair value raised to Rs 284 from Rs 276 per share
Though we lower our earnings estimates, our fair value estimate is raised to Rs 284 from Rs 276 per share (1.3x FY15E adjusted book value) as we roll forward our discounting year to FY15. At the current market price of Rs 190, our valuation grade is 5/5.

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