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Suresh Krishnamurthy

AN investment in the rights offer of Dewan Housing Finance can be considered. The offer is being made at Rs 35 per share.

The offer price is almost the same as the market price as well as the book value of the stock.

The stock valuation at the rights offer price is attractive. An investment at this price holds the potential to generate capital appreciation commensurate with the risk involved.

Steady growth: Dewan Housing Finance has grown steadily over the years. Operating income and profits grew over the past four years at an average annual rate of 13 per cent and 10 per cent respectively. The return on shareholder funds generated by the company has also been reasonably moderate at about 15 per cent.

Dewan Housing has also been in the housing finance industry for over 20 years. It specialises in catering to the middle and lower income segment. Typically, the ticket size of the loans granted by the company is between Rs 2 and Rs 2.5 lakh.

In the words of its managing director, it needs to sew up four times more applications each year to match its competition in terms of loan growth.

Operations in the lower end of the market segment have, however, not brought the company higher spreads. According to the Managing Director of Dewan Housing, the company's spreads (difference between the rate at which funds are borrowed and the rate at which funds are lent) are above 2 per cent.

This is more or less the same level at which competitors operate. The incidence of bad loans has, however, not been high for Dewan Housing. It is now at about 1 per cent of advances.

Funding growth: The capital adequacy ratio of Dewan Housing was adequate at end-March 2004 at over 17 per cent. The management is, however, augmenting the capital base to fuel growth. Its disbursements for the year ended March 2004 were about Rs 468 crore. The management expects this number to increase significantly as it enters newer markets. Hence, this offer has been made to shareholders. The valuation of the offer is reasonable. The price-to-earnings ratio is less than six times its earnings for the period ended September 2004.

The dividend yield is also attractive at above 7 per cent. The potential for growth in operations and earnings also appear bright. The market price of the stock, too, hovers near the offer price.

Considering transaction costs, it may not be possible to acquire the stock at a price below the offer price.

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