Rating Rationale
February 27, 2019 | Mumbai
Dewan Housing Finance Corporation Limited
Rating downgraded to 'CRISIL A1' ; Continues on 'Watch negative'
 
Rating Action
Rs.1525 Crore Commercial Paper (Reduced from Rs.8000 Crore) CRISIL A1 (Downgraded from 'CRISIL A1+' and Continues on 'Rating Watch with Negative Implications') 
Rs.1000 Crore Short Term Deposit# CRISIL A1 (Downgraded from 'CRISIL A1+' and Continues on 'Rating Watch with Negative Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
#This rating does not pertain to the company's Fixed Deposit programme. As per management, the current outstanding amount under this rated instrument is only ~Rs 11 crore as on date and they plan to fully repay the same shortly.
Detailed Rationale

CRISIL has downgraded its short-term rating on the debt instruments of Dewan Housing Finance Corporation Limited (DHFL) to 'CRISIL A1' from 'CRISIL A1+'. The rating continue on 'Rating Watch with Negative Implications'. At the company's request, CRISIL has reduced the quantum of rated commercial paper (CP) to Rs 1,525 crore from Rs 8,000 crore, being equal to the outstanding CP quantum.
 
The rating action is driven by the limited progress in the last one month in raising funds (including securitisation), its cascading impact on business operations (reflected in negligible disbursements) and slower-than-envisaged build-up of on-balance sheet liquidity. CRISIL has noted the recent spate of events and news regarding DHFL and believes that, in a confidence-sensitive market, the company's financial flexibility and resource raising ability have been further impacted.
 
DHFL has stated its intention to take steps to raise additional funds and increase on-balance sheet liquidity, including sell-down of its developer loan exposures and divestment of stake in associate entities by March 2019. Further, the company has also announced plans to induct a strategic investor. Progress on these initiatives and timely receipt of funds within the next month will remain key rating sensitivity factors.
 
During the month of January 2019, DHFL raised aggregate funds of Rs 1375 crore through sell-down of a project loan. CRISIL understands that DHFL is in the final stages of raising a significant amount through securitisation route. The company has indicated that their securitisable pool of assets remains high. However, CRISIL believes that continued reliance on this route will not help sustain resource profile for a longer period, especially in the context of muted disbursements. In order to conserve liquidity, DHFL has significantly curtailed its disbursements.
 
Nevertheless, CRISIL notes that DHFL has maintained liquidity at ~Rs 4,800 crores currently. Additionally, DHFL has stated that it is in the final stages of undertaking securitisation transactions and hopes to complete the same over the next two weeks. DHFL estimates that collections from loan assets will be around Rs 2200 crore per month over the next three months. Against this, they have scheduled average monthly outflows (including debt / loan repayments and securitisation payouts) of around Rs 3450 crore over the next three months. CRISIL has noted an increase in the premature fixed deposit withdrawals during the first three weeks of February 2019 and any higher than anticipated redemption will be a key rating sensitivity factor. DHFL has publicly stated its intention to buy back outstanding CP of Rs 1525 crore within the next month.
 
CRISIL has also noted the recent news of resignation of independent director from DHFL's Board. Further, the Joint Managing Director & CEO has also stepped down from the Board although he will continue in an executive role. As per DHFL, this decision is in alignment with DHFL's plan of closing a strategic partnership deal shortly which requires broad-basing and demarcating the Board of Directors from daily management. They have also immediately recommended appointment of two Directors to replace these positions on the Board, subject to receipt of requisite approvals.
 
CRISIL will continue to monitor the ability of DHFL to raise quickly raise sufficient diversified resources and prop up its on-balance sheet liquidity. The progress displayed within the next month in fund raising, build-up of liquidity and business growth will be key rating sensitivity factors.

Analytical Approach

For arriving at the ratings, CRISIL has consolidated DHFL with Avanse Financial Services Ltd (Avanse). CRISIL believes that DHFL and Dewan group, will provide distress support to Avanse for timely repayment of debt obligations till the time it is part of the Dewan group. Consequently, the rating of Avanse remains linked to DHFL and Dewan group. CRISIL has noted that DHFL, on February 2, 2019, has approved divestment of its entire shareholding in Aadhar Housing Finance Limited (Aadhar Housing) to an entity controlled by private equity funds managed by Blackstone. The proposed transaction is subject to applicable regulatory and other approvals. However, CRISIL believes that Blackstone's ability to provide timely financial support to Aadhar Housing is feasible only after completion of sale process. Consequently, Aadhar Housing's ability to raise funds from diversified resources including traditional bank lines will be linked to DHFL and Dewan group. CRISIL will completely delink Aadhar Housing from DHFL as part of its analytical approach, once the transaction is formally consummated or there is greater clarity on the impact of the transaction on Aadhar Housing's credit profile.

Key Rating Drivers & Detailed Description
Strengths:
* Long and established position within HFC industry
DHFL has been operating for more than 30 years in the housing finance industry. On standalone basis, it had assets under management (AUM) of Rs 126,720 crore as on December 31, 2018 (Rs 130,182 crore as on September 30, 2018). DHFL also has sizeable presence in the affordable housing finance segment. DHFL remains focused on providing housing finance primarily to low- and middle-income customers in tier-II and tier-III cities, which account for majority portion of its branch network (352 locations as on December 31, 2018). In terms of AUM mix, DHFL had around 57% loans towards housing, 21% towards loan against property, 17% towards project loans, and 5% towards loans to small and medium enterprises (SME).
 
* Healthy asset quality as on date
DHFL has reported healthy asset quality till date as reflected in low reported gross NPAs of 1.12% as on December 31, 2018 (0.96% as on September 30, 2018). The GNPAs, on a 2-year lag basis, stood at around 1.6% as on December 31, 2018. Asset quality in housing loan segment is supported by a relatively low-risk, granular loan book, supported by focus on low- and middle-income customers in tier-II and tier-III cities. Average ticket size is ~Rs 15 lakh, which makes the loan book granular.
 
Given the situation on the fund-raising and liquidity front at the industry level, asset quality in segments such as loans to SMEs, loans against property (LAP) and real estate developer loans would be the key monitorables going forward. This stems from the sensitivity of borrowers in these segments to prolonged funding crunch. So while current delinquencies are not high, if the funding situation for non-banks does not stabilise over a period of time, asset quality challenges could manifest. However, CRISIL notes that DHFL's reported asset quality metrics have remained healthy till date.
 
Weaknesses
* Modest capital position
Reported networth and capital adequacy ratio (CAR) were Rs 10,750 crore and 17.74%, respectively, as on December 31, 2018 (Rs 10,401 crore and 16.19%, respectively, as on September 30, 2018). DHFL's reported gearing stood at 9.3 times as on December 31, 2018. Gearing (adjusted for securitisation) remained high, at around 12.1 times as on December 31, 2018.
 
* Modest earnings
RoMA, though stable, at 1.3% during the nine months of fiscal 2019, was lower than that of peers (on reported basis RoA stood at 1.4% during same period). This was primarily because of intense competition resulting in low spreads, and high operating expenses on account of large branch network and small ticket size of loans.
Liquidity

DHFL's liquidity profile remains a critical monitorable due to the limited progress in raising funds (including securitisation) during the last one month. During the month of January 2019, DHFL raised aggregate funds of Rs 1375 crore - through sell-down of a project loan. CRISIL understands that DHFL is in the final stages of raising a significant amount through securitisation route. In order to conserve liquidity, DHFL has significantly curtailed its disbursements.
 
Nevertheless, CRISIL notes that DHFL has maintained liquidity at ~Rs 4,800 crore currently. Additionally, DHFL has stated that it is in the final stages of undertaking securitisation transactions and hopes to complete the same over the next two weeks. DHFL estimates that collections from loan assets will be around Rs 2200 crore per month over the next three months. Against this, they have scheduled average monthly outflows (including debt / loan repayments and securitisation payouts) of around Rs 3450 crore over the next three months. Further, CRISIL has also noted an increase in the premature fixed deposit withdrawals during the first three weeks of February 2019 and any higher than anticipated redemption will be a key rating sensitivity factor. CRISIL also notes that DHFL has publicly stated its intention to buy-back its outstanding commercial paper of Rs 1525 crore within the next month.
 
DHFL has also stated its intention to take various steps to raise additional funds and increase on-balance sheet liquidity including sell-down of its developer loan exposures and divestment of its stake in associate entities by March 2019. Progress on these initiatives and timely receipt of funds within the next month will be key rating sensitivity factors.

About the Company
Incorporated in 1984, DHFL primarily provides housing finance to individuals, especially to the low- and lower-middle-income groups in tier-II and tier-III cities. The company also offers non-housing loans such as LAP, developer loans, and SME loans. In December 2010, it acquired Deutsche Post Bank Home Finance Ltd (DPBHFL) to enter the middle- and upper-middle-income segments in tier-I cities. DPHFL was renamed First Blue Housing Finance Ltd. and was merged into DHFL in March 2013. DHFL has a pan-India presence at around 352 locations / customer touch points as on December 31, 2018.
 
Profit after tax and total income (net of interest expense) stood at Rs 1,172 crore and Rs 2,500 crore during fiscal 2018 as against profit after tax (including one-time gain from sale of investment) and total income (net of interest expense) of Rs. 2,896 crore and Rs 4,173 crore, respectively, in fiscal 2017.
 
For the nine months ended December 31, 2018, profit after tax stood at Rs 1,187 crore and total income (net of interest expense) stood at Rs 2,407 crore.
Key Financial Indicators (Standalone)
As on / For the period ended
March 31/September 30
 Unit Dec 31, 2018
(9 months)		 March 31, 2018 March 31, 2017
Total assets Rs cr 1,10,953 1,07,572 92,298
Total income Rs cr 8,922 10,465 10,827
Profit after tax Rs cr 1,187 1,172 2,896
Gross NPA % 1.12 0.96 0.94
Gearing (excluding off-book) Times 9.3 10.5 10.2
Gearing (Including off-book) Times 12.1 12.7 11.7
Return on assets (Reported) % 1.4* 1.2 1.2
*On annualised basis

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Instrument Date of allotment Rate of interest (%) Date of redemption Issue size Rating assigned with outlook
NA Commercial paper NA NA 7-365 days 1525 CRISIL A1/Watch Negative
NA Short-term deposit# NA NA 7-365 days 1000 CRISIL A1/Watch Negative
#This rating does not pertain to the company's Fixed Deposit programme. As per management, the current outstanding amount under this rated instrument is only ~Rs 11 crore as on date and they plan to fully repay the same shortly.
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  1525.00  CRISIL A1/(Watch) Negative  02-02-19  CRISIL A1+/Watch Negative  30-11-18  CRISIL A1+  27-10-17  CRISIL A1+    --  -- 
            06-11-18  CRISIL A1+           
            07-05-18  CRISIL A1+           
Short Term Debt  ST              11-07-17  CRISIL A1+  07-07-16  CRISIL A1+  CRISIL A1+ 
Short Term Deposit  ST  1000.00  CRISIL A1/(Watch) Negative  02-02-19  CRISIL A1+/Watch Negative  30-11-18  CRISIL A1+  27-10-17  CRISIL A1+  07-07-16  CRISIL A1+  -- 
            06-11-18  CRISIL A1+  11-07-17  CRISIL A1+       
            07-05-18  CRISIL A1+           
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Finance Companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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