DHFL-Case Study

Part 2

For this part let us re-evaluate DHFL every year from 2013-2017

2013

Let us assume one year has passed since our analysis and we plan to relook at DHFL. ( 31st July 2013)

Source: screener.in

Source: screener.in

This year too,  the ROA of the company is similar to 2012 at around 1.28% and the growth in Loan book is 33%

ROA is  similar to expected lines, showing that there is no improvement in the loan book quality of DHFL. However, the growth is still mind boggling @ 33%, while our expectation was for it to slow down slightly over next 5 years. Its better to investigate further this high growth rate. This could be noise which may slow down over next 4 years or maybe we are missing something big.

Let us compare the loan book growth rate of other players.

Clearly, DHFL is growing at the same rate as GRUH, despite being almost 10 times bigger than GRUH. Right now it is better to wait for few more results to be sure that this is not noise.

Share Price

The price of the company has fallen from Rs 100 to around Rs 80. At this point, if there is some confidence in the growth of the company very small percentage of the portfolio may be allocated, however we are still against allocating a very high percentage as there are still doubts regarding the quality of Loans given or management quality.

You may have a different viewpoint we would love to know why? And how?

2014

Let us assume two years have passed since our analysis and we plan to relook at DHFL. ( 31st July 2014)

Source: screener.in
Source: screener.in
2014 Annual Report

This year too,  the ROA of the company is similar to 2013 at around 1.28% and the growth in Loan book is 29%

ROA is  similar to expected lines, showing that there is no improvement in the loan book quality of DHFL. However, the growth  @ 29% is still higher, lets see what others have grown.

Clearly, DHFL is growing very fast. GRUH is not doing the same. Either DHFL is giving bad quality loans or it has found something unique.

It seems we are missing something. From previous two years our expectation regarding the growth of DHFL to slow down is slowly being on the verge of wrong. However, those estimates were 5 year growth estimates. 

Share Price

1 year view, Source: in.tradingview.com

2 year view, Source: in.tradingview.com

Market seems to be realising the growth potential of DHFL and upgrading its estimate of the same.

Either we are missing something big or the market seems right. At this stage, still we won’t have allocated a huge amount of our portfolio considering we are not sure of the quality of loan book of DHFL, however we may have allocated a slight amount (Considering the fact we may be wrong).

You may think differently and may have done something else? We would love to know why?

2015

Let us assume three years have passed since our analysis and we plan to relook at DHFL. ( 31st July 2015)

Source: screener.in

Source: screener.in

This year,  the ROA of the company has fallen from 2014 1.28% to 1.12% and the growth in Loan book is 28%

ROA  has fallen, showing that there is some deterioration in the loan book quality of DHFL.

There has been change in the borrowing profile of the DHFL. The company has  massively increased its dependency on Borrowings from financial markets. (From 16% to around 29%)

2014 Borrowing Profile 
Source: 2014 Annual Report
2015 Borrowing Profile
Source: 2015 Annual Report

Though the growth in DHFL Loan book is spectacular (Out of our expectations in 2012), but the falling ROA is still a reason for concern, as this does not seem to be an industry where there is some competitive advantage and DHFL is still not showing signs of competitive advantage being built. 

Share Price

1 year view
Source: in.tradingview.com
3 year view
Source: in.tradingview.com

Either we are missing something big or the Loan book quality of DHFL is still not good.

At this stage still, we  continue with our small allocation and not recommended higher allocation of the portfolio as we are not sure of the Loan Book Quality of the company. In fact the Loan Book quality seems to be deteriorating, either the portfolio allocation can be trimmed slightly too.

If you would have thought differently, we would love to know the reason why.

2016,2017

Let’s assume its been two years since our previous analysis and we again give look at DHFL on (31st July 2017)

Source: screener.in
(P&L 2017 includes one off item of 2000 crores)
Source: screener.in
(Reserves 2017 include one off item of 2000 crores)

Over past two years,  the ROA of the company has fallen from 1.12% to 0.91%  and the growth in Loan book is 28%

ROA  has fallen, showing that there is some deterioration in the loan book quality of DHFL since past two years  as it is consistently falling from 1.28% to 1.12% to 0.91% over 2017.

Even the Loan book growth of the industry which was very fast has started to slow. Now there are high chances for bad quality players to get hit. Only if we have trust in the management quality of the company then it makes sense to hold the company. However, in the case of DHFL there is not much evidence to be confident about management quality. 

5 year View: The loan book growth of the company over past 5 years has averaged about 25%. (As assumed in valuation during 2012), however the fall in ROA was not expected. Hence, the valuation of the company ought to fall. 

Share Price

Though the share price has risen, we still believe that now specially with slow growth of DHFL , when there is no evidence of moat or management quality , the allocation in the company should be reduced and kept small. The chances of DHFL outperforming have reduced significantly.

You may think differently and we would love to know why?

While this all may be easy said in theory, having strict control over ones emotions over such wild rides in prices requires practice and patience. Sticking to ones views, where one may be wrong while the price is rising is tough. However, cases like these helps us to sharpen our mind and to be aware and we’ll practised as and when we have similar kind of situations in future.

You  may visit screener.in, main annual reports, valuepickr.com to see how people were thinking at that time and in.tradingview.com for prices. These resources are really helpful..

Before Going further it would be better if you Analyse the case or do the valuation or allocation according to your own Method. That way it may help you to do better with the case further and sharpen your mind for future.

Pick Parts of the case study and use it as it may be helpful to you.

May we all learn and progress together

What Happened?

In order to see what happened, please click on 3 at the bottom of page.

Part 3……………………….

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