Initiate ‘buy’ coverage on DHFL with a target price of R642 per share. Despite triggers for sustainable improvement in RoEs, DHFL trades at a huge discount to other mortgage financiers due to higher cost structure. Management’s conscious efforts to rectify the same, along with ebbing investor concerns on a few other risks will lead to re-rating of mortgage business to fair value of 1.75x P/ABV (FY16e) based on Gordon growth model. Insurance business with intrinsic value of R38 per share will provide further leg up.
DHFL is a dominant player in niche markets (Tier II & III cities) with strong foothold in the limited competition low and middle income (LMI) segment. This, in conjunction with pan-India presence, offers a huge opportunity landscape in an under-penetrated market. Moreover, the company has gained expertise in the LMI and self employed class which is largely under serviced. DHFL has attained a commendable feat of maintaining benign asset quality despite operating in tougher segments by virtue of following stringent in-house appraisal systems. The company has built a lucrative model that caters to a gamut of potential customer base, portending humongous growth opportunities. Focused approach on retail loans with less than 6% of exposure to developer loans also lends comfort. We estimate it to sustain loan CAGR of 20% plus, which along with improving NIMs, will lead to an impressive 23% PAT CAGR and improve RoE to over 19% in FY17e.