DHFL winning back shareholder faith

The stock of Dewan Housing Finance Corporation (DHFL) shot up by 4.9% on Monday to its 52-week high of Rs 326. The company seems to have regained investors’ confidence following its robust performance in the September 2010 quarter. DHFL primarily focuses on financing the housing needs of the lower and middle-income segments. During the September quarter, its net profit grew nearly 1.5 times from the year ago. The surge is partly on account of a one-time profit of Rs 29 crore on the sale of investments. But more commendable is the fact that the net profit growth was a strong 71% even after excluding the effect of the extraordinary item. The growth was backed by 71% growth in disbursements on a year-on-year basis. While the company has reported similar growth in the earlier quarters also, this time around the growth on a sequential basis has also been substantial. Disbursements grew by 31% quarter-on-quarter in the September quarter. A similar spike was seen in the September 2009 quarter. A possible reason could be the slow credit off-take in the housing segment during the first quarter, which is then supplemented by a pick-up from the second quarter onwards. Despite faster growth in disbursements, asset quality has not deteriorated. The asset quality has seen consistent improvement in the last five quarters. In the September quarter, nonperforming assets were 0.4% of net advances. DHFL’s net interest margin (NIM) stood at 3% at the end of the September quarter. NIM is a measure of the interest spread between the company’s borrowing and lending costs. At this level, it has surpassed its larger peer LIC Housing Finance, which reported an NIM of around 2.9% for September. In fact, the company has managed to keep the margin around 3% for the past five quarters. With the interest rates rising, it needs to be seen whether the company will be able to pass on the hike in its costs to its borrowers given the stiff competition in the industry. At 16 times its trailing 12-months earnings, the company’s stock is trading at its all-time high valuations. From hereon, a similar performance in the coming quarters might keep the tempo going.