Stock Review: Dewan Housing Finance Corporation (DHFL)

THE latest acquisition by Dewan Housing Finance Corporation (DHFL) is expected to help the company achieve its ambition of becoming a geographically diversified player in the growing housing finance business. This should improve its stock valuation, which had taken a beating after the recent scandal involving its bigger peer LIC Housing Finance.

   DHFL, along with its holding company and another long-term investor, has acquired the Indian housing finance arm of Deutsche Postbank AG, one of the largest retail banks in Germany. The acquired company, Deutsche Postbank Home Finance (DPHF), has reported . 38 crore in net profit during the first half of FY11. The deal consideration of . 1,079 crore is nearly 14 times the target company's annualised earnings for FY11.

   This looks to be on the higher side when compared with the price-earnings ratio of 9-12 for LIC Housing Finance and GIC Housing Finance. However, the DHFL management has cited that given the expectation of robust growth in the target's earnings in the next two years, the deal valuation looks attractive.

   Of the total deal value, DHFL will pay 729 crore to DPHF's parent company. This will be funded using debt instruments having an aver-age interest rate of 10.5%. This means, DHFL would have to shell out around . 76 crore annually to service the debt. It would more or less offset the additional profit that would come from the acquired company at least initially.

   This, however, may not stoke much concern since DHFL has reported robust financial performance in the last couple of years. Net profit of the company has grown at a compound annual growth rate of 46% in the last four years. This was on the back of an average 38% annual disbursement growth over the same period.

   Another important point is that the deal offers geographical diversification to DHFL, which mainly operates in the western and southern parts of the country. With DPHF under its wings, DHFL gets an easy access to the northern parts of India. Also, it will now be able to cater to a higher loan segment of 15 lakh, more than double its current average loan size of 6 lakh. This augurs well for the DHFL's core business.

   On the operational front, the deal adds over 32,000 customers to DHFL's existing client base of over 1.5 lakh. DHFL's current loan book size of . 11,145 crore will also expand by nearly half that amount. This will result in a 2.5% growth in DHFL's market share.

   On the whole, the deal looks favorable to DHFL. Its stock went up by about 7.2% on Thursday post the announcement. This might offer some relief to shareholders who had seen a sharp 10% fall in the stock price last week.