>DEWAN HOUSING FINANCE LIMITED (MOTILAL OSWAL)

■ Strong loan growth to continue: Dewan Housing Finance (DHFL) has been among the fastest growing housing finance companies in the past five years. Its loan book and disbursements registered a CAGR of 39% and 37%, respectively (well above peers) over FY04-09. In 1HFY10, loans and disbursements grew 50% and 78% YoY respectively. With the capital in place (raised Rs3b in 1QFY10, leading to CAR of 22%), we expect disbursements and loan book to register a CAGR of 46% and 42%, respectively over FY09-11.

■ Poised for the next leap in a niche business: DHFL is a niche player in the housing finance business with a focus on middle and low income customers (not a key target segment for other HFCs and banks) in tier-II and tier-III cities. Its average loan size was Rs0.46m in 1HFY10 compared with ~Rs1.3m for LIC Housing Finance.

■ Superior margins can be sustained: DHFL's core competence of lending to low and middle income customers gives it better pricing power and superior margins (~3%). Despite liquidity crunch in FY09, DHFL sustained its margins at 2.93%. In the near term, margins could improve, as the benefit of capital raising will continue and comfortable liquidity will keep wholesale funding costs low. In 1HFY10, NIM was 3.06%.

■ Commendable performance on asset quality: Despite exposure to high-risk low-income customers, DHFL's GNPAs were greater than 1.8% over FY03-09. Net NPAs were 1.07% as of 1HFY10. The management's expertise in handling this customer segment and its cardinal principle of lending only to "end users" enables it to sustain asset quality.

■ Fee income to drive earnings: DHFL is focusing on growing fee income through insurance distribution, project marketing and by providing technical services to developers. It aims to earn fees to cover its operating expenses fully.

■ Valuation and view: DHFL offers a strong combination of value and growth with a strong CAR of over 20%. We expect earnings CAGR of ~54% over FY09-11, RoA to improve from 1.6% to 2% and RoE to improve from 21% in FY09 to 23% by FY11 despite capital raising in 1QFY10. Adjusting for the value of key investments after 20% discount (Rs19/share), the stock trades at 1.2x FY11E BV and 5.9x FY11E EPS. We maintain Buy, with an SOTPbased target price of Rs241.

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