Buy DHFL best stock in housing finance sector

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Pee Vee
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Buy DHFL best stock in housing finance sector

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Housing Finance Sector: Low risk, steady growth

We interacted with the DHFL management to grasp the emerging sectoral trends and those affecting DHFL in particular. The Housing Finance sector has enjoyed a sweet spot so far, having registered a healthy double digit annual growth for over a decade. The share of housing loans by banks and NBFCs put together as a % of GDP has substantially risen from 2.1% in FY00 to 8.5% in FY15. Sustained demand backed by ever-evolving, well-defined RBI and NHB guidelines has kept the sector low risk, thereby attracting many players that have contributed to the sector’s growth. Despite their higher cost structures compared to banks, HFCs have grabbed market share, thanks to their strong origination skills, faster turnaround times, deeper distribution reach into rural and semi-urban areas and effective service to the self-employed class. The share of HFCs in total housing loans has consistently risen, standing at 40% as on FY15.

Since the last couple of years, the HFC business mix has undergone a favorable change, both on assets and liability front. Since the last couple of years, the HFC business mix has undergone a favorable change, both on assets and liability front. Price wars emanating from sharp reduction in MCLR in the past 3-6 months has seen many players competing for the coveted home loan portfolio. This has lowered the yields for HFCs and further expansion of NIMs is difficult to come by. However, the strong governmental thrust on affordable housing should improve supply and aid loan growth.

DHFL: in a sweet spot

DHFL is one of the largest HFCs in India, operating since the past three decades and primarily focused on the LMI segment. It has a pan-India branch network, consciously built in Tier II and III cities led by customer focus. DHFL is sweetly positioned to take advantage of the government’s thrust on affordable housing catering to the EWS and LIG segments.

DHFL has witnessed strong competitive pressures in the recent past, leading to decelerating loan growth and falling yields. Despite these pressures, it has managed to hold on to NIMs owing to an increase in the share of project loans in the loan mix along with increase in the share of lower cost debt capital market borrowing through the tapping of the bond market. Cost/income ratio, which was quite high a couple of years ago, due to investments in distribution, advertising and branding, is gradually dipping and will continue to fall for some more time. While loan growth pressures will persist in the near term, the longer-term growth outlook is quite robust. Stable margins, improving cost/income ratio and controlled credit costs are likely to keep profitability levels intact. The stock currently trades at 1x FY19 P/Adj. BV.
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