Investment Rationale
Niche presence in the semi-urban and rural areas of Gujarat and Maharashtra
Overall, the company operates 121 retail offices across seven states
Gujarat and Maharashtra also accounted for +75% of the disbursements in FY12, with the balance coming from states like Madhya
Pradesh, Karnataka, Rajasthan, Tamil Nadu and Chhattisgarh
Riding on strong housing demand, the company provides sustainable growth trajectory
Disbursements have grown at a CAGR of 26% and PAT at 32% over the last 5 years.
Well managed Asset Quality with 100% Loan coverage (Gross NPA of 0.52% and Net NPA – Nil)
Robust NIMs backed by consistent operating performance
NIMs at ~ 5% in the last 2 years are amongst the best in the industry
Cost to Income Ratio at less than 20% is lowest among its peers following branch based business model
Best in class Return Ratios
ROA in excess of 3%
ROEs of ~ 30%
Stable Borrowing Mix
Apart from conventional bank borrowings and re-finance facilities from NHB, the company has regularly tapped other financing sources
such as NCDs, commercial paper and public deposits. In the last few years, GRUH has reduced its reliance on bank borrowings in favor of
facilities from NHB The change in borrowing mix will help in drastically bringing down the borrowing cost for the
6
NHB. composition of the company and hence aid the company in maintaining its robust margins in the years to follow
Robust NIMs Backed by Consistent
Operating Performance
Gruh Finance enjoys pricing power in rural and semi-urban market due to low competition and low interest rate
sensitivity.
The company has been able to pass on increased cost of funds to borrowers and maintain its NIMs at ~5% during past 2
years. We expect the trend to continue going forward .
Moreover the company faces limited competition risk in the markets in which it is already operational as the lower to
middle housing finance segment entails high cost of operation.
Operations in rural and semi-urban areas entail significant cost in terms of client assessment and customer acquisition
due to small ticket loans and servicing of customers at rural locations.
Besides, cost of collection is higher as repayment through outstation cheques delay actual realization of funds. Due to
such entry barriers, Gruh Finance faces limited competition from small number of PSU banks and local money lenders.
On demand side, interest rate sensitivity is lower for middle to low income group since effective interest rates are lesser
due to tax benefits of upto 2.5 lacs per annum.
Besides, more than 98% of its loan book comprises of floating rate loans. Consequently, Gruh Finance has been able to
pass on increased cost of funds to borrowers and maintain its NIMs at ~5% during last 2 years.
Valuation
The stock trades at premium valuation of 8x FY13E and 6.3x FY14E
P/ABV. Due to consistent growth prospects, stable performance,
healthy margins and well managed asset quality, we believe that the
stock would continue to trade at a premium multiplier.
Gruh Finance’s operating performance in last 2 years has been quite
remarkable delivering the best return ratios in the industry.
The company has outperformed its parent company HDFC on
parameters like return ratios and loan growth.
We have valued the stock at 8x FY14E P/ABV which gives us the price
target of Rs. 266 reflecting an upside of 22% to CMP.
We expect the company’s loan book to witness healthy CAGR of 24%
during FY12-14 with steady NIMs at ~5%.
We initiate coverage with a BUY rating on the stock.
Any unfavorable change in policies such as cost of refinancing by NHB
would adversely affect rural demand leading to rise in NPAs.
The stock currently trades at premium valuation on account of best in
Risk Factors
y p
class NIMs. Any increase in funding costs may adversely impact NIMs
and hence reduce the target multiple.
Sharp deterioration in asset quality
Sharp slowdown in loan growth
Regulatory developments which may enhance the competitive
pressure in the housing finance market
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