Rating Rationale
May 11, 2019 | Mumbai
Dewan Housing Finance Corporation Limited
Rating downgraded to 'CRISIL A4+' ; Continues on 'Watch Negative' 
 
Rating Action
Rs.850 Crore Commercial Paper CRISIL A4+ (Downgraded from 'CRISIL A3+' ; Continues   on 'Rating Watch with Negative Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its rating on the commercial paper of Dewan Housing Finance Corporation Limited (DHFL) to 'CRISIL A4+' from 'CRISIL A3+'. The rating continues to be on 'Rating Watch with Negative Implications'.
 
The downgrade is driven by more-than-expected reduction in the company's liquidity because of further delays in fund raising from sell down of project finance loans and lower inflows from securitisation of non-housing loans. Additionally, CRISIL notes that DHFL, as a strategic decision, did not resort to securitisation of readily available housing loans to prop up the liquidity levels. CRISIL also notes higher-than-scheduled liability repayments. CRISIL believes there is heightened additional risk of unscheduled early redemption of NCDs. On the other hand, there is low visibility regarding timely fund raising. Consequently, DHFL's liquidity levels are expected to remain low with reduced cushion or buffer for upcoming cash outflow. With liquidity weaker than previously envisaged, sensitivity of timely receipt of funds from various initiatives has increased significantly.
 
Liquidity dropped to Rs 2,775 crore as on April 30, 2019 (including SLR). On the other hand, scheduled aggregate cash outflows (including loan repayment and securitisation payouts) till July 2019 remains high, estimated at Rs 8,400 crore. Exercise of option by investors in NCDs with acceleration clauses will materially increase the scheduled outflow.
 
DHFL's management continues to focus on induction of a strategic investor and securitisation of non-housing loan exposures. These initiatives remain critical for restoring market confidence, which will help build resource-raising ability.
 
CRISIL has also noted the company's plan to raise equity of up to Rs 2,000 crore. However, timely receipt of funds is critical at this juncture and visibility of the same is limited.
 
CRISIL will continue to monitor DHFL's ability to quickly raise sufficient and diversified resources and prop up its balance sheet liquidity. The progress of various initiatives and their impact on fund raising, build-up of liquidity, and business growth will be key rating sensitivity factors.

Analytical Approach

For arriving at the rating, CRISIL has combined the business and financial risk profiles of DHFL and Avanse Financial Services Ltd (Avanse). CRISIL has noted DHFL's approval on March 17, 2019, of divestment of its entire shareholding in Avanse. The proposed transaction is subject to regulatory and other approvals. CRISIL believes DHFL and the Dewan group will provide distress support to Avanse for timely repayment of debt till it is part of the Dewan group, and during the intervening period till the proposed divestment is completed post-receipt of regulatory and other approvals. CRISIL will delink Avanse from DHFL as part of its analytical approach, once the transaction is formally completed.

Key Rating Drivers & Detailed Description
Strengths
*Established market position
DHFL has been in the housing finance industry for more than 30 years. On a 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). The company also has a large presence in the affordable housing finance segment, and remains focused on providing funding options primarily to low- and middle-income customers in tier-II and tier-III cities (which comprised the majority of its branch network of 352 locations as on December 31, 2018). In terms of AUM mix, around 57% loans were towards housing, 21% towards loans against property (LAP), 17% towards project loans, and 5% towards loans to small and medium enterprises (SMEs).
 
*Healthy asset quality
Robust asset quality is reflected in low reported gross non-performing assets (GNPAs) of 1.12% as on December 31, 2018 (0.96% as on September 30, 2018). On a two-year lag basis, GNPAs stood at 1.6% as on December 31, 2018. Asset quality in the housing loan segment is supported by a relatively low-risk, granular loan book because of the focus on low- and middle-income customers'average ticket size is Rs 15 lakh.
 
Given the pressure on fund-raising and liquidity at the industry level, asset quality in segments such as loans to SMEs, LAP, and real estate developer loans will be key monitorables going forward. This is because of the sensitivity of borrowers in these segments to a prolonged funding crunch. So, while current delinquencies are not high, if the funding situation for non-banks does not stabilise over time, asset quality challenges could manifest. However, CRISIL notes that DHFL's reported asset quality metrics have remained healthy till date.
 
CRISIL also notes that the current challenges in overall credit profile of DHFL has not yet impacted collections. As per management, DHFL's current collection efficiency till March 2019 remains above 99%, inline with past trends. Further, their collections are primarily in non-cash mode and their ECS repayment return rates over the last six months are similar to pre-September levels. CRISIL will continue to monitor closely DHFL's collection efficiency and asset quality metrics.

Weaknesses
*Modest capital position
Reported networth and capital adequacy ratio 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). Reported gearing was 9.3 times. Gearing adjusted for securitisation also remained high at 12.1 times.
 
*Modest earnings
Return on managed assets, though stable at 1.3% during the first nine months of fiscal 2019, was lower than that of peers (reported return on assets was 1.4%), 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

Liquidity dropped to Rs 2,775 crore as on April 30, 2019. On the other hand, scheduled aggregate cash outflows (including loan repayment and securitisation payouts) till July 2019 remains high at an estimated Rs 8,400 crore. Additionally, exercise of option by investors in NCDs with acceleration clauses will materially increase the scheduled outflow. More-than-anticipated premature redemption of fixed deposits remains a key rating sensitivity factor. DHFL estimates collection from loan assets at Rs 2,200 crore per month. DHFL's liquidity levels are expected to remain low with reduced cushion or buffer for upcoming cash outflow. With liquidity weaker than previously envisaged, sensitivity of timely receipt of funds from various initiatives has increased significantly.

About the Company

Incorporated in 1984, DHFL primarily provides housing finance to 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. DPBHFL was renamed First Blue Housing Finance Ltd and was merged with DHFL in March 2013. DHFL has a pan-India presence through 352 customer touch points as on December 31, 2018.
 
Profit after tax (PAT) and total income (net of interest expense) stood at Rs 1,172 crore and Rs 2,500 crore, respectively, during fiscal 2018, against PAT (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, PAT was Rs 1,187 crore and total income (net of interest expense) was Rs 2,407 crore.

Key Financial Indicators (Standalone)
As on/for the period ended 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 NPAs % 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 an 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 no Instrument Date of allotment Rate of
interest (%)		 Date of redemption Issue
size (Rs.Cr)		 Rating assigned
with outlook
NA Commercial Paper NA NA 7-365 days 850 CRISIL A4+/Watch Negative
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  850.00  CRISIL A4+/Watch Negative  17-04-19  CRISIL A3+/Watch Negative  30-11-18  CRISIL A1+  27-10-17  CRISIL A1+    --  -- 
        22-03-19  CRISIL A2+/Watch Negative  06-11-18  CRISIL A1+           
        27-02-19  CRISIL A1/Watch Negative  07-05-18  CRISIL A1+           
        02-02-19  CRISIL A1+/Watch Negative               
Short Term Debt  ST              11-07-17  CRISIL A1+  07-07-16  CRISIL A1+  CRISIL A1+ 
Short Term Deposit  ST    --  22-03-19  Withdrawn  30-11-18  CRISIL A1+  27-10-17  CRISIL A1+  07-07-16  CRISIL A1+  -- 
        27-02-19  CRISIL A1/Watch Negative  06-11-18  CRISIL A1+  11-07-17  CRISIL A1+       
        02-02-19  CRISIL A1+/Watch Negative  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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