Rating Rationale

Dewan Housing Finance Corporation Limited

Rated amount enhanced

Rs.60 Billion Short Term Debt Programme
(Enhanced from Rs.50 Billion)

CRISIL A1+(Reaffirmed)

CRISIL's rating on the short-term debt programme of Dewan Housing Finance Corporation Ltd (DHFL) continues to reflect DHFL's strong market position in the housing finance segment and its healthy asset quality supported by high granularity in the underlying portfolio. These rating strengths are partially offset by the company's average capitalisation and average, albeit improving, earnings profile.

DHFL has a strong market position in the housing finance segment as reflected in the significant scale achieved by the company over the past few years. DHFL is the third largest housing finance company (HFC) with assets under management (AUM) of Rs.546 billion as on March 31, 2015 (Rs.448 billion as on March 31, 2014). The significant improvement in scale of operations was driven by healthy three-year compound annual growth rate of 28 per cent in AUM till 2014-15 (refers to financial year, April 1 to March 31), as well as the acquisition of Deutsche Postbank Home Finance Ltd (DPHFL) in December 2010.

DHFL remains focused on providing housing finance primarily to low- and middle-income customers in tier-II and tier-III cities; these cities account for nearly 80 per cent of its branch network (188 branches as on March 31, 2015). The acquisition of DPHFL has provided DHFL with access to high-income customer segments and presence across India. While competition in the mortgage finance segment will remain high, DHFL will continue to benefit from the strong growth potential in its target customer segment over the medium term. Hence, CRISIL believes that DHFL's AUM will continue to grow at a healthy pace and the company will maintain its position among prominent HFCs over the medium term.

DHFL's growth has been driven by its focus on housing loans, which accounted for around 75 per cent of its AUM as on March 31, 2015 (78.5 per cent as on March 31, 2014, and 82.6 per cent as on March 31, 2013), unlike its peers. While the company is focusing on increasing its non-housing loan book (loans against property [LAP] and construction finance) to support its profitability, these segments are unlikely to account for more than 25 per cent of its AUM over the medium term.

DHFL also has healthy asset quality. It has relatively low gross non-performing assets (NPAs), at 0.95 per cent as on March 31 2015, despite increasing from 0.80 per cent as on March 31, 2014. Its weak assets (two-year lagged gross NPAs), at 1.4 per cent as on March 31, 2015, remain marginally higher than peers. DHFL's asset quality is supported by its relatively low-risk and granular loan book, given its focus on providing housing finance to low- and middle-income customers in tier-II and tier-III cities. DHFL has built a granular loan book with an average ticket size of around Rs.1.2 million (incremental average ticket size of Rs.1.9 million), which remains significantly lower than that of peers. Its average loan-to-value ratio also remains fairly low, at 46.9 per cent for 2014-15.

DHFL's asset quality is also supported by its established credit policies and practices through a hub-and-spoke model. A large proportion of loan origination by the in-house sales team ensures the quality of borrowers. CRISIL believes that DHFL will maintain its strong asset quality in the housing finance segment supported by its highly granular loan book and strong systems and processes. However, the company's ability to maintain asset quality in the LAP portfolio remains to be seen, especially given the high growth over the past few years and relatively low seasoning in the segment.

DHFL has average capitalisation, marked by higher-than-industry-average gearing. The company's adjusted net worth and Tier-I capital adequacy ratio (CAR) were Rs.46.3 billion and 12.5 per cent, respectively, as on March 31, 2015 (Rs.35.7 billion and 11.9 per cent, respectively, as on March 31, 2014). The company raised equity capital of Rs.8.1 billion through qualified institutional placement in February 2015 to support its growth over the medium term. Its net worth coverage for net NPAs, at 13.4 times as on March 31, 2015, remained adequate despite declining from 17.0 times as on March 31, 2014. Following the capital raising in 2014-15, its gearing (adjusted for securitisation), has declined to 11.8 times as on March 31, 2015 (12.1 times as on March 31, 2014), however the gearing remains higher than peers. While gradual improvement in profitability over the next two years will lead to increased internal cash accruals, DHFL's ability to regularly raise equity capital to support its sizeable growth plans will remain a key monitorable.

DHFL has average, albeit improving, profitability. Its return on assets (RoA) ratio remained stable, at 1.3 per cent in 2014-15, and was lower than that of its peers, primarily because of the intense competition in the housing loan business, DHFL's relatively low proportion of high-yield non-housing portfolio, and high operating expenses resulting from large branch network and low ticket size. Nevertheless, DHFL's profitability is stable, with large housing loan portfolio resulting in low credit costs. DHFL's profitability is expected to improve gradually, with RoA improving to around 1.5 per cent over the next two years, driven by improvement in interest spreads because of increasing proportion of non-housing loans, reduced cost of borrowing, and enhanced operating efficiency as the company scales up operations.