Rating Rationale

Strengths
* Strong market position in HFC industry
DHFL has significantly ramped up operations in recent years. It is the fourth largest HFC with assets under management (AUM) of Rs 94,090 crore as on September 30, 2017 (Rs 69,524 crore a year ago). The AUM rose 23% in the three fiscals through 2017. DHFL also has sizeable presence in the affordable housing finance segment through its associates Aadhar Housing Finance Ltd. and DHFL Vysya Housing Finance Ltd. DHFL remains focused on providing housing finance primarily to low- and middle-income customers in tier-II and tier-III cities, which account for nearly 80% of its branch network (348 locations as on September 30, 2017). Though competition may remain intense in the mortgage finance segment, strong demand should continue to drive healthy growth in AUM, helping DHFL maintain its competitive position among HFCs over the medium term.

The company has increased the proportion of relatively high-yield non-housing loan book (loans against property [LAP], construction finance of residential projects, and small and medium enterprise [SME] finance) to support its profitability in the past 1-2 years. The construction finance portfolio grew to around Rs 14,208 crore as on September 30, 2017 (from Rs 10,058 crore as on March 31, 2017). Accordingly, its proportion in the advances portfolio increased to around 15% as on September 30, 2017 from around 9% as on March 31, 2016. The company plans to tap potential housing finance customers from those projects. LAP, the other major non-housing segment, grew 26% to over Rs 16,500 crore (accounting for 18% of portfolio). SME finance maintained its share at 3% in the loan book. Rapid growth in the non-housing segment (considering project loans in non-housing segment) in fiscal 2017 resulted in increase in share to 34% of the loan book in fiscal 2017 from 28% in the previous fiscal. CRISIL believes that while the overall growth will remain 20% over the medium term, implementation of the Real Estate (Regulation and Development) Act, 2013, may affect growth in the near term.

* Healthy asset quality
DHFL's healthy asset quality is reflected in low gross NPAs of 0.96% as on September 30, 2017 (0.93% as on March 31, 2016). The GNPAs, on a 2-year lag basis, improved to 1.33% as on March 31, 2017, from 1.41% as on March 31, 2016. The gross NPAs in housing declined to 0.45% as on March 31, 2017, from 0.58% a year earlier. Asset quality 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 of Rs 12 lakh (incremental average ticket size of Rs 19 lakh), which remains significantly lower than that of peers, makes the loan book granular. Asset quality is also supported by healthy credit underwriting policies and strong operational systems and processes. A large chunk of loan origination is done by the in-house sales team, ensuring the borrower profile remains healthy. On the non-housing side, gross NPAs increased to 0.49% as on March 31, 2017, from 0.34% as on March 31, 2016. CRISIL believes DHFL will maintain its strong asset quality in the housing loan segment supported by its highly granular loan book and established systems and processes. However, ability to maintain asset quality in the non-housing segment (includes LAP and project loans) will remain a key monitorable.

Weaknesses
* Subdued capital position
Adjusted networth and Tier-I capital adequacy ratio (CAR) were Rs 8,393 crore and 13.4%, respectively, as on September 30, 2017 (Rs 5742 crore and 12.2%, respectively, a year earlier). Gearing (adjusted for securitisation) remained high, at around 11.8 times as on September 30, 2017 (it was at 13.6 times as on March 31, 2016). During fiscal 2017, the company offloaded its 50% stake in DHFL Pramerica Life Insurance and booked gain of Rs 1,969 crore. The networth coverage of net NPAs remained comfortable, at 19 times, as on March 31, 2017 (14 times as on March 31, 2016). Given the company's growth plans, CRISIL believes DHFL's capitalisation will remain constrained by higher-than-industry-average gearing. Ability to infuse capital at regular intervals will remain a key monitorable.

* Modest earnings
RoA, though stable, at 1.2% in fiscal 2017, was lower than that of peers, primarily because of intense competition, low proportion of high-yield non-housing portfolio, and high operating expenses resulting from large branch network and small ticket size of loans. Nevertheless, the large housing loan portfolio ensures low credit cost. Profitability is expected to improve gradually, driven by growth in non-housing loans, and enhanced operating efficiency from ramp-up in scale.

DHFL is expected to maintain substantial amount of liquidity over the medium term. As on March 31, 2017, total liquid assets (cash & cash equivalents) held by DHFL stood at over Rs 16,000 crore which are adequately staggering short-term debt maturities. Moreover, short-term debt is unlikely to exceed 12% of total estimated liabilities as on March 31, 2018. CRISIL believes short term debt will not exceed the quantum rated by CRISIL.