>DEWAN HOUSING FINANCE (MOTILAL OSWAL)

■ Capitalizing on domain experience and niche presence: Given its rich domain experience of over 25 years, large presence, strong customer relationships, and quick turnaround time, we believe that DHFL is sweetly poised to capture the opportunity presented by the growing demand for housing in rural and semi-urban regions. Being a niche player in the housing finance business, with a focus on middle and low income customers in tier-II and tier-III cities, it enjoys higher yields and margins than peers. Its average incremental ticket size was Rs840,000 as on December 2009 compared with ~Rs1.4m for LIC Housing Finance.

■ Efficient utilization of capital; strong growth to continue: DHFL has been one of the fastest growing housing finance companies in the last six years. Its loan book and disbursements registered a CAGR of 39% and 37%, respectively (well above peers) over FY04-09. In 1QFY10, DHFL raised Rs3b through equity dilution, taking its tier-I ratio to 20%. Post
capital raising, growth rates have remained very strong and significantly higher than industry. In 9MFY10, loans and disbursements grew 55% and 78% YoY, respectively. On a lower base and higher ticket size, we expect loan growth of 40% CAGR and disbursement growth of 37% CAGR over FY10-12.

■ Superior margins, high asset quality: Though its cost of funds is higher and it has low exposure to the non-retail segment, DHFL's niche presence enables it to earn superior margins. Also, despite exposure to high-risk low-income customers, DHFL's asset quality is relatively high. Its gross NPA ratio was <1.6%>
asset quality.

■ Fee income initiatives gaining traction: DHFL is focusing on growing fee income through insurance distribution, project marketing and by providing technical services to developers. In 9MFY10, DHFL's third-party distribution income was Rs175m as compared to just Rs30m in FY09. Fee income (including processing fees) was Rs450m in 9MFY10 as compared to Rs170m in FY09. We factor in fee income of Rs1b in FY11.

■ Offers strong growth-value combination; Buy: DHFL offers a strong combination of growth and value, with superior asset quality. We expect earnings CAGR of ~37% over FY10-12. RoA should improve from 1.6% in FY09 to 1.9%+ by FY12 and RoE from 21% in FY09 to ~25% by FY12. Adjusting for the value of key investments after 20% discount (Rs14/ share), the stock trades at 1.3x FY12E BV and 5.9x FY12E EPS. We maintain Buy, with a revised SOTP-based target
price of Rs288 (1.8x FY12E BV + Rs14/share for key investments).

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