Housing Finance August 21, 2014
Repco Home Finance
Bloomberg: REPCO IN Reuters: RHFL.BO
BUY
Institutional Equities
India Research
INITIATION REPORT
Recommendation
CMP: Rs442
Target Price: Rs548
Upside (%) 24%
Stock Information Market Cap. (Rs bn / US$ mn) 27/453
52-week High/Low (Rs) 515/221
3m ADV (Rs mn /US$ mn) 125/2.1
Beta 0.78
Sensex/ Nifty 26,314/7,875
Share outstanding (mn) 62
Stock Performance (%) 1M 3M 12M YTD
Absolute (5.5) 3.5 86.6 26.8
Rel. to Sensex (7.9) (4.1) 29.4 2.1
Performance
Source: Bloomberg
Click here to enter text.
Analysts Contact Asutosh Kumar Mishra
022-6184 4329
0 100 200 300 400 500 600
15,500 17,500 19,500 21,500 23,500 25,500 27,500
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Sensex (LHS) Repco Home
Emerging Star! Structurally, Repco Home Finance Ltd. (RHFL) is well-positioned to
sustain high growth momentum with best in class return ratios. Superior
execution skill demonstrated by the current management team in shaping
the current business has put the company on strong growth path. Over the
next few years, we expect RHFL sanctions, disbursements and loan book to
grow at a robust pace, which is likely to be driven by expansion in branch
network, increasing urbanization and shift towards nuclear family.
We expect loan book to sustain the 25‐30% growth trajectory for the next
two years. Further, profits of RHFL are expected to grow 30-35% primarily
owing to lower NPA’s, superior margin profile and low cost operating
model. We initiate coverage with “BUY” recommendation.
Strong presence in niche segment offers enormous growth opportunities:
RHFL has a strong franchise in GDP rich southern and western India along
with long-term sustainable business model. Over the last few years the
company has built a niche presence in lending to self employed as well as
salaried borrowers, which will aid strong growth in the coming years. We
expect a loan book CAGR of ~30% over the next two years.
Differential business model aid stable NIM’s: With primary focus on
underserved borrower segment, it is catering to the increasing needs of
customers in Tier -2 and Tier-3 cities along with satellite towns of tier-1 cities.
This helps the company to command relatively higher yield on loans
resulting in stable and healthy NIM’s of ~4.5%.
Lean Operating model to contain operating cost: Majority of the RHFL
branches operate on minimal cost with a team of 2-3 local people. Further,
administrative costs are also lower as loan processing and monitoring are
done from the centralized location. This helps the company to maintain the
cost to income ratio to below 19%.
Initiating Coverage with BUY: Target Price Rs548/share: We expect Repco
Home Finance to continue to command a premium valuation over its other
peers due to superior return ratios along with niche business model, high
capitalization & good execution. We initiate converge on the company with a
BUY stance and a target price of Rs548/share, (3.25x FY16E BV of Rs169). Key Financials
Y/E Mar (Rs mn) FY12 FY13 FY14 FY15E FY16E
NII 1,144 1,374 1,908 2,536 3,314
Operating Profit 998 1,189 1,742 2,322 3,117
PAT 615 800 1,101 1,398 1,852
BV (Rs) 65 102 119 140 169
P/BV (x) 6.77 4.33 3.71 3.15 2.62
PER (x) 33.4 34.3 25.0 19.7 14.8
Avg. ROE (%) 22.3 17.1 16.0 17.3 19.3
Avg. ROA (%) 2.5 2.4 2.6 2.5 2.6
Source: Company, Karvy Institutional Research
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August 21, 2014
Repco Home Finance
Share Holding Pattern
Source: BSE
Loan book mix (1QFY15)
Source: Company, Karvy Institutional Research
Promoter ,
37.40%
FII,
12.20%
DII,
11.90% Others,
38.50%
Salaried
Home Loan,
44.7%
Self
Employed
Home Loan,
36.1%
Loan Against
property
(LAP), 19.2%
Company Financial Snapshot Profit & loss (Rs. mn) FY14 FY15E FY16E
Net Interest Income 1,908 2,536 3,314
Other operating income 186 204 218
Other Income 12 15 18
Net Operating Income 2,106 2,755 3,551
Operating Expenses 364 434 434
Operating Profit 1,742 2,322 3,117
Depreciation 24 27 29
Provisions and Contingencies 227 340 480
Profit Before Tax 1,491 1,955 2,608
Taxes 390 557 756
Profit After Tax 1,101 1,398 1,852
Company Background
Chennai headquartered Repco Home Finance Ltd. (RHFL) is
promoted by The Repatriates Co-operative Finance and
Development Bank Limited (Repco Bank), a Government of
India enterprise. Government of India owns 76.8% in the
bank. As a multi-state cooperative bank, Repco Bank cannot
offer products which have repayment tenure of more than 7
years. As a result, home loans are done through its
subsidiary, RHFL.
RHFL focuses on self-employed/lower income segment in
the underserved tier-2 and tier-3 centers and peripheries of
Tier-1 centers. Current RHFL is operating through 91
branches and 42 satellite centres in Tamil Nadu, Andhra
Pradesh, Kerala, Karnataka, Maharashtra, Madhya Pradesh,
Gujarat, Odisha, West Bengal and Puducherry.
Balance Sheet (Rs mn) FY14 FY15E FY16E
Equity & Liabilities
Net Worth 7,411 8,721 10,485
Long term borrowings 29,108 39,238 51,392
Other long-term liab & prov. 557 780 1,049
Non-current Liabilities 29,666 40,018 52,440
Current Liabilities 10,314 13,776 17,916
Total Liabilities 47,390 62,515 80,842
Assets
Fixed Assets 50 57 66
Non-current investments 124 124 124
Deferred tax assets 187 187 187
Long term loans and advances 43,637 57,402 74,398
Non-current assets 43,997 57,770 74,775
Current assets 3,393 4,745 6,067
Total Assets 47,390 62,515 80,842
Ratio (%) FY14 FY15E FY16E
Loan Book Growth 31.5 32.3 29.6
Borrowings Growth 27.3 34.8 31.0
Cost of Fund - CoF 8.32 8.25 8.20
Yield On Fund - YoF 11.05 11.13 11.20
Net Interest Margin 4.51 4.65 4.65
Spread 2.72 2.88 3.00
Gross NPA Ratio 1.47 1.30 1.20
Net NPA Ratio 0.71 0.55 0.40
PCR 51.60 57.69 66.67
Credit Cost 0.49 0.55 0.60
Total CAR 24.5 23.4 21.2
Effective Tax Rate 26.17 28.50 29.00
RoA 2.58 2.54 2.58
Leverage Ratio 15.64 13.95 12.97
RoE 16.01 17.33 19.28
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August 21, 2014
Repco Home Finance
Investment Rationale
Strong presence in niche segment offers enormous growth opportunities: RHFL
is well placed to tap the huge growth opportunities in the affordable housing
space in urban, Tier -2, Tier-3 cities and satellite towns of Tier-1 cities. Over the last
decade the company has build an expertise in areas and customer segments which
were under served by banks and large HFC’s (Housing Finance Companies).
Exhibit 1: Loan book growth will remain at healthy level
led by the higher growth in LAP portfolio
Source: Company, Karvy Institutional Research
Exhibit 2: Disbursement growth is expected to remain
healthy
Source: Company, Karvy Institutional Research
RHFL has a network of 122 branches, of which majority are located in underserved
locations while 55% of its customer base belongs to self employed category. With
deeper penetration in existing geographies (Southern region) along with enormous
potential in affordable housing segment, RHFL is expected to deliver loan book
CAGR of ~30% over FY15-16E.
Exhibit 3: Loan book mix (%)
Source: Company, Karvy Institutional Research
Exhibit 4: Region-wise loan book (1QFY15)
Source: Company, Karvy Institutional Research
Differential business model aid stable NIM’s: RHFL has managed to command
higher yields in both home loans and LAP (Loan Against Property) on account of
superior and differentiated service proposition to an under‐served segment. Small
ticket size loans will ensure continued NHB refinance on lower cost.
6,5
13
9,8
65
13,
996
20
,73
5
28,
041
35,
447
46,
619
61,
686
79,
955
48.6 51.5
41.9 48.1
35.2
26.4 31.5
32.3
29.6
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15E
FY
16E
(%) (Rs mn)
Loan Book growth (RHS)
10,423 11,674
17,153
22,000
25,000
FY12 FY13 FY14 FY15E FY16E
(Rs mn)
46.5 46.8 45.0 44.5 44.3
39.5 38.1 36.3 36.0 35.8
14.0 14.9 18.7 19.5 20.0
FY12 FY13 FY14 FY15E FY16E
Salaried HL Self Employed HL Loan against property
Andhra
Pradesh, 13%
Karnataka,
12%
Kerala, 4%
Maharastra,
5% Puducherry,
2%
Tamil Nadu,
64%
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August 21, 2014
Repco Home Finance
Exhibit 5: Funding Mix - Well placed to take advantage of interest rate cycle (%)
Source: Company, Karvy Institutional Research
However in the borrowing mix of RHFL, the contribution from NHB (National
Housing Bank) has declined over the last few years. The company plans to
increase it LAP portfolio to 20% of loan book from current 18% by end FY15 which
will help to maintain margins despite marginal increase in borrowing costs.
Exhibit 6: Spread is expected to improve marginally (%)
Source: Company, Karvy Institutional Research
Exhibit 7: NII growth is expected to remain healthy
Source: Company, Karvy Institutional Research
Lean Operating model to contain cost: Majority of RHFL branches operate with a
small team (2-3 people) with minimal cost structure. Administrative costs are also
low as the loan processing and monitoring is done from a centralized location.
Localized and direct advertisement campaign along with local referral has resulted
into relatively lower client acquisition cost for the company. This has helped the
company to maintain cost to income ratio below 20%.
Exhibit 8: Cost to Income Ratio to remain below 20%
Source: Company, Karvy Institutional Research
Exhibit 9: Operational efficiency has improved gradually
Source: Company, Karvy Institutional Research
38
.1
59.
4
46.
9
35.
4
38.
0
43.
0
50.
6
65.
0
65.
0
65.
0 7.6
5.9
0.6 7.7
13.6 9.8 12.9
10.0 10.0 10.0 54.
3
34.
7
52.
5
56.
9
48.
3
47.
2
36.
5
25.
0
25.
0
25.
0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E
Banks REPCO Bank National Housing Bank
10.3 11.1 11.2 10.8 11.3 11.4 11.0 11.1 11.2
7.4 8.2
7.1 7.1
8.1 8.7 8.3 8.3 8.2
2.9 2.9
4.1 3.7 3.1 2.7 2.7 2.9 3.0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E
Yields CoF Spread
4.5 4.9
5.9 5.4
4.6 4.2
4.5 4.6 4.7
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
-
500
1,000
1,500
2,000
2,500
3,000
3,500
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15E
FY
16E
(%) (Rs mn)
NII NIM (RHS)
17.1
22.9
15.3 11.9 12.9
14.7 15.6 18.9
17.0 19.0
-
5.0
10.0
15.0
20.0
25.0
- 100 200 300 400 500 600 700
(%) (Rs mn)
Operating expenses Cost to income (RHS)
88 92 122
137 152
319 385 382
450 526
0
100
200
300
400
500
600
0
50
100
150
200
FY
12
FY
13
FY
14
FY
15E
FY
16E
(Rs mn) (No. of Branches)
No of Branches Business per branch (Rs mn)
5
August 21, 2014
Repco Home Finance
Assets Quality will remain at manageable level: Over the last few years RHFL
has developed robust two tier credit appraisal and risk management process,
which has helped it maintain assets quality even during the economic slowdown.
The company maintains a conservative LTV ratio of 60-65% for high risk self
employed segment. On the other hand for loan against property the company
maintains LTV of 50-55%.
Exhibit 10: NPA to remain under manageable level (%)
Source: Company, Karvy Institutional Research
Exhibit 11: Return ratio are best in class (%)
Source: Company, Karvy Institutional Research
As such, the return on equity declined from 22.3% in FY12 to 16.01% in FY14.
Going ahead, we expect leverage will improve as the company grows its loan book
and we expect RoE's to trend towards 20% by FY16E. However, return on assets at
2.6% is expected to remain strong in the coming period.
Well capitalized to support strong growth over next two year: The Company
raised Rs27bn in Q4FY13 through its public offer and Tier-1 currently stands at
24.5% at the end of FY14. Strong profitability growth along with Tier I ratio of 25%
is well enough to support its growth plan over the next 3-4 years. As a result we
expect the return ratios to improve further from current levels.
Exhibit 12: Capital adequacy ratio remain at comfortable level (%)
Source: Company, Karvy Institutional Research
1.36 1.48 1.47
1.30 1.20
0.94 0.98
0.71
0.55
0.40
FY12 FY13 FY14 FY15E FY16E
GNPA Ratio NNPA Ratio
23.5 22.3
17.1 16.0
17.3 19.3
3.2
2.5 2.4 2.6 2.5 2.6
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-
5.0
10.0
15.0
20.0
25.0
FY11 FY12 FY13 FY14 FY15E FY16E
ROE (LHS) ROA (RHS)
18.2 16.5
25.5 24.5
23.4 21.3
FY11 FY12 FY13 FY14 FY15E FY16E
6
August 21, 2014
Repco Home Finance
Outlook & Valuation
At the CMP, the stock is trading at 3.15x and 2.62x P/BV of FY15E and FY16E, and
at 19.66x and 14.84x FY15E and FY16E earnings, respectively, which we feel to be
attractive considering the potential business growth, differentiated business model
and sustainable growth in profits.
Over the past few years RHFL has delivered a strong growth in operating profit
led by the presence in high yielding niche segment along with healthy growth in
loan portfolio. Loan book recorded a CAGR of 35.8% over the FY09-14 led by rapid
expansion of network centers to 122 in FY14 from 45 in FY09. During the same
period the company reported an operating profit CAGR of 34.6%.
Further, low operating expenditure along with best in class asset quality has
enabled the company to deliver 32.5% CAGR in net profit, over the same period
resulting in an average RoA of 2.9% and RoE of 16%.
We expect significant improvement in operating leverage would lead to 135 bps
rise in ROE to 17.4% in next two years. Besides, we also believe return on assets at
2.6% is expected to remain strong, second only to Gruh Finance in the housing
finance space.
Exhibit 13: Historically RHFL had traded at premium valuation
Source: Company, Karvy Institutional Research
Within mid size housing finance company RHFL will continue to get premium
valuation due to its higher ROA aided by differentiated business model and
sustainable growth in profits. Based on the improving return profile and growth
opportunities, we expect improvement in investor perception of the risk-reward
equation resulting in the stock re-rating up-wards.
We have assigned a relatively higher multiple of 3.25x on FY16 book value for the
company based on the superior execution skill demonstrated by the current
management team in shaping the current business, which has put the company on
strong path. We initiate coverage on Repco Home Finance with a “BUY”
recommendation and target price of Rs548 (3.25x FY16E BV of Rs168.7).
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P/BVPS (x) Mean +1 SD -1 SD
7
August 21, 2014
Repco Home Finance
Peer Comparison
Exhibit 14: Peer Comparison RHFL & GRUH Finance
REPCO Home Finance GRUH Finance
Rs mn FY10 FY11 FY12 FY13 FY14 FY10 FY11 FY12 FY13 FY14
Disbursement 5,831 9,156 10,423 11,674 17,153 7,800 12,110 14,870 21,740 25,770
Loan book 14,080 20,753 28,041 35,447 46,619 24,490 31,720 40,670 54,380 70,090
PAT 456 582 615 800 1,101 690 915 1,203 1,459 1,770
GNPA 174 252 382 525 686 272 260 211 174 189
GNPA % 1.24 1.21 1.36 1.48 1.47 1.11 0.82 0.52 0.32 0.27
M Cap - - - 10,443 20,448 7,575 12,664 22,405 37,530 52,685
yoy % Growth
Loan book 42.14 47.39 35.12 26.41 31.52 17.40 29.52 28.22 33.71 28.89
Disbursement 36.12 57.02 13.84 12.00 46.93 19.08 55.26 22.79 46.20 18.54
PAT 68.79 27.56 5.69 30.20 37.59 37.92 32.70 31.50 21.22 21.31
GNPA 83.79 44.75 51.65 37.43 30.67 38.63 (4.32) (18.69) (17.72) 8.44
M Cap - - - - 95.81 136.46 67.17 76.92 67.51 40.38
BV 41.76 26.87 25.50 56.32 16.77 19.53 19.42 20.16 26.34 22.44
Per Share Data
BV 41.01 52.03 65.30 102.08 119.20 15.24 18.20 21.87 27.63 33.83
ROA 3.64 3.26 2.50 2.50 2.70 2.65 3.02 3.12 2.94 2.76
ROE 25.50 26.60 22.80 17.40 16.40 28.00 31.00 34.00 33.00 32.00
P/BV 18.44 15.27 10.77 8.49 6.77 4.33 3.71 19.47 16.77 14.03
Source: Company, Karvy Institutional Research
Exhibit 15: Peer Comparison CANFIN Home Finance & DEWAN Housing Finance
CANFIN Home Finance DEWAN Housing Finance
Rs mn FY10 FY11 FY12 FY13 FY14 FY10 FY11 FY12 FY13 FY14
Disbursement 5,470 4,730 8,590 18,140 25,480 38,656 65,100 90,700 133,577 166,475
Loan book 21,070 22,080 26,740 40,160 58,480 87,584 141,000 194,000 339,000 406,000
PAT 392 420 438 541 757 1,507 2,651 3,064 4,519 5,290
GNPA 232 243 187 161 117 1,016 1,509 1,474 2,407 3,167
GNPA % 1.10 1.10 0.70 0.40 0.20 1.16 1.07 0.76 0.71 0.78
M Cap 16,470 21,950 23,066 28,239 38,960 16,754 27,992 27,861 20,855 28,195
yoy % Growth
Loan book 11.66 4.79 21.11 50.19 45.62 50.83 60.99 37.59 74.74 19.76
Disbursement 81.73 (13.53) 81.61 111.18 40.46 70.59 68.41 39.32 47.27 24.63
PAT 24.30 7.21 4.15 23.68 39.89 64.23 75.94 15.55 47.49 17.07
GNPA (12.27) 4.79 (22.93) (14.18) (27.19) 19.03 48.50 (2.27) 63.25 31.57
Mcap 54.47 33.27 5.09 22.42 37.97 411.21 67.08 (0.47) (25.14) 35.19
BV 4.69 13.43 11.84 12.35 15.18 40.99 39.80 17.04 45.11 10.22
Per Share Data
BV 134.00 152.00 170.00 191.00 220.00 105.88 148.02 173.25 251.41 277.11
ROA 1.90 1.90 1.80 1.60 1.50 2.04 2.01 1.92 1.71 1.70
ROE 15.00 15.00 13.00 14.00 17.00 22.20 19.49 19.02 17.86 17.59
P/BV 3.57 2.99 2.85 2.51 2.25 2.00 1.74 4.76 4.59 3.25
Source: Company, Karvy Institutional Research
8
August 21, 2014
Repco Home Finance
Industry Analysis
Low Mortgage Penetration Implies Room for Growth
The mortgage industry in India is 10-12 years behind other regional emerging
market like that in China and Thailand, in terms of penetration in the economy.
Due to various structural drivers, such as young population, reducing family size,
urbanisation and rising income levels, the growth rates in this segment should
remain healthy over the longer term.
Exhibit 16: India continue to remain one of the lowest
mortgage penetrated market in Asia
Source: NHB, Ministry of Urban Development
Exhibit 17: India’s median age of 26.2 years is low as
compared to other EM’s and developed market
Source: NHB, Ministry of Urban Development
Exhibit 18: Mortgage to GDP ratio currently estimated at
12%, compared to 2% in 2002
Source: NHB, Ministry of Urban Development
Exhibit 19: Mortgages comprise the largest component in
banks’ retail portfolio
Source: NHB, Ministry of Urban Development
Exhibit 20: Urban Housing Shortage
Source: NHB, Ministry of Urban Development
Exhibit 21: Cities with a population > 1 mn
Source: NHB, Ministry of Urban Development
1.0%
2.0%
3.0%
6.0%
9.0%
17.0
%
20.0
%
26.0
%
29.0
%
32.0
%
39.0
%
41.0
%
81.4
%
87.6
%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
25
26.2
29.3
34.8
36.9
38.7
40
40
42.5
43.5
44.8
44.9
0
10
20
30
40
50 (Yrs)
2.0% 4.0%
9.0% 11.0%
14.0%
17.0%
20.0%
2002 2006 2009 2012P 2015P 2018P 2020P
23.7%
12.8%
7.3% 7.7%
19.3%
10.6%
15.0% 18.4%
32.0%
28.0%
23.0% 24.0% 20.8% 21.7%
19.2%
26.9%
19.8%
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
yoy Growth Bank yoy Growth HFC
Homeless,
3%
Non-
Servicable
Katcha , 5%
Obsolescent
House, 12%
Congested
Houses
Requiring
New House ,
80%
10
25
35
55
75
1981 1991 2001 2011 2021(P)
9
August 21, 2014
Repco Home Finance
Aggression from banks is expected to subside
With revival of growth in the traditional corporate loan market, the banks will be
increasingly aggressive in corporate loan, leading to gain of market share and
profitability for HFCs.
Further, base rate regime prevents aggressive undercutting from banks. Reducing
base rates has other consequences for banks, including a drop in yields across all
loan portfolios linked to base rates, making this move unlikely particularly given
the existing pressures on profitability. Further analysis suggest that incremental
home loan profitability already well below benchmark returns for banks.
Exhibit 22: Gap between Bank’s Home loan and Base rate is coming down
Source: Company, Karvy Institutional Research
Under current guidelines, LTV on home loans is capped at 80% for banks. Further,
there is higher capital charge on loans with higher LTV. These could prevent
aggression from banks on LTV.
Negligible impact of abolition of prepayment penalties on smaller ticket loans -
Analysis of the prepayment and shifting of loans indicates that abolition of
prepayment penalties is not a serious threat for the competitiveness of HFCs. This
is particularly true for loans with low ticket sizes.
Loans with ticket sizes of Rs10 mn and above have seen increasing
prepayments/shifting. But loans of smaller ticket sizes have not seen an increase in
prepayments as evidenced by LIC Housing Finance Ltd. and HDFCs prepayment
rate over the last few years.
9.7%
9.9%
10.3% 10.3%
10.0%
9.9%
10.3% 10.3% 10.3% 10.3%
SBI ICICI Bank PNB BOB Axis Bank
Base Rate (%) Current Home Loan rate (%)
10
August 21, 2014
Repco Home Finance
Emergence of Mid size HFC’s
Over the last few year mid size HFC’s has differentiated them from large HFC’s by
offering loan product to underserved segment. This helps them to maintain
healthy growth along with higher profitability.
Exhibit 23: Mid-size HFC’s have differential themselves from large HFC’s
Source: CRISIL, Karvy Institutional Research
Exhibit 24: Mid size HFC’s has witnessed rapid growth advances
Source: CRISIL
Mid Size HFC’s have a large proportion of high yielding self employed
segment
Exhibit 25: Customer Profile – Large HFC’s
Source: CRISIL
Exhibit 26: Customer Profile – Mid Size HFC’s
Source: CRISIL
19.1
33.5 35.6
45.2
34.1
22.8
29.4
24.7 23.6
17.1
0
10
20
30
40
50
2010 2011 2012 2013 2014
Mid-Size HFCs (yoy % growth in loan) Large HFCs (yoy % growth in loan)
Non
Salaried,
16.9%
Salaried,
83.1%
Non
Salaried,
59.6%
Salaried,
40.4%
Higher Cost
of
Borrowing +
Higher
competition
Strategies to
offset this:
Focus on
higher
yielding
assets
segment
Higher
Gross
NPA
Compared
to large
HFC’s
Higher NIM’s
enable
management
for higher
opex and
credit cost
Leading
to RoA’s
similar to
large
HFC’s
Small
Size and
Higher
Growth
11
August 21, 2014
Repco Home Finance
However, borrowing cost of Mid Size HFC’s are higher compared to large HFC’s.
As a result they have limited ability to tap bond market.
Exhibit 27: Large HFC's borrowing mix
Source: CRISIL
Exhibit 28: Mid size HFC's borrowing mix
Source: CRISIL
Higher NIM’s in mid size HFC’s help the management of these companies to
sustain relatively higher Opex and credit cost.
Exhibit 29: Mid Size HFC’s has relatively higher NIM’s
Source: CRISIL
Exhibit 30: ....which is partially offset by higher Opex
Source: CRISIL
Exhibit 31: Credit cost of mid size HFC’s are relatively
higher
Source: CRISIL
Exhibit 32: However, return ratio of mid size HFC’s are
comparable to large HFC’s
Source: CRISIL
Bond
NCD, 51%
Borrowing
s from
Banks, 28%
Deposits,
19%
NHB
Refinance,
1%
CP, 1%
Bond NCD,
51%
Borrowings
from Banks,
41%
Deposits,
1%
NHB
Refinance,
20%
Others, 1%
3.1% 3.2%
2.8% 2.8% 2.8%
3.1%
3.7% 3.6% 3.5% 3.5%
FY10 FY11 FY12 FY13 FY14
Large HFC NIM's Mid-sized HFC NIM's
0.6% 0.6% 0.5% 0.5% 0.5%
0.8%
1.0% 1.0% 1.0%
1.2%
FY10 FY11 FY12 FY13 FY14
Large HFC Opex Mid-sized HFC Opex
0.2%
0.3%
0.2%
0.1% 0.1%
0.2%
0.5%
0.3% 0.3%
0.4%
FY10 FY11 FY12 FY13 FY14
Large HFC Credit cost Mid-sized HFC Credit cost
2.3% 2.3%
2.2% 2.2% 2.2%
2.3% 2.3%
2.1%
2.0% 2.0%
FY10 FY11 FY12 FY13 FY14
Large HFCs RoA Mid-sized HFCs RoA
12
August 21, 2014
Repco Home Finance
Regulatory Initiatives have strengthened the sector
Recent regulatory incentives to promote housing segment
Refinance support by National Housing Bank (NHB) continues to
remain at healthy level.
Additionally; US$1bn annual ECB (External Commercial Borrowings)
window for low-cost housing has been announced.
Setting up of Central Registry of Securitisation Asset Reconstruction
and Security Interest of India (CERSAI) will gradually reduce risk of
multiple loans against same property.
Setting up of the Credit Risk Guarantee Fund for promotion of low
income and affordable housing.
Emerging business in mortgage guarantee market to widen
addressable segment.
Exhibit 33: Total disbursements by NHB (Bank + HFC’s)
under Its Refinance Schemes
Source: RBI, Karvy Institutional Research
Exhibit 34: Disbursements to HFC's by NHB Under Its
Refinance Schemes
Source: RBI, Karvy Institutional Research
Key policy initiatives in budget for promoting housing segment
Rs40bn for NHB from the priority sector lending shortfall with a view
to increase the flow of cheaper credit for affordable housing to the
urban poor/EWS/ LIG segment is provided.
Slum development to be included in the list of Corporate Social
Responsibility (CSR).
Sets aside Rs80bn for National Housing Banking program.
Increase in deduction of interest on housing loans for self-occupied
property from Rs0.15mn to Rs0.2mn.
Also increase in deduction of principal repayment has been enhanced
from Rs0.1mn to Rs0.15mn.
A sum of Rs70.6bn is provided in the current fiscal for the project of
developing “One Hundred Smart Cities.
Pass through status for Real estate investment trusts (REITs).
Dividend distribution tax to be payable at SPV level.
66.1
80.5
124.
7
162.
7
192.
7
167.
8
16
4.6
198.
0
225.
8
285.
6
358.
0
27.1 32.5
80.6 56.3 55.0
85.9 108.5
81.1
120.4 143.9
157.5
0
50
100
150
200
0
50
100
150
200
250
300
350
400 (Rs bn) (Rs bn)
Total Outstanding Incremental Disbursements
46.3
47.4
49.3
18.9
49.2
47.5
103.
2
111.
5
108.
9
132.
9
165.
6
17.7 18.5 26.2
18.4 12.4 11.9
70.6
35.4 33.1
53.0 60.7
0
10
20
30
40
50
60
70
80
0
50
100
150
200 (Rs bn) (Rs bn)
Total Outstanding Incremental Disbursements
13
August 21, 2014
Repco Home Finance
Key Assumption
We expect earnings CAGR to remain healthy at 30.9% over FY14-16E
driven by strong loan growth (CAGR of 35.8% over FY14-16E), steady
cost ratios and stable asset quality.
Cost benefit in the form of low cost NHB funding will continue to
accrue, given that average ticket sizes of new origination is still below
INR1.5m, aiding stable NIM of 4.65%.
The management expects to open 15 branches annually. Further, the
company is also experimenting with the direct sales model for
increasing its reach and penetration.
Given its low cost branch model, we expect cost to income ratio ratios
to remain below 20% during FY14-16E.
On improving economic outlook we expect assets quality to improve
further in coming period. We expect gross NPA to decline to 1.2% and
net NPA to 0.4% in FY16 from 1.47% in 0.71% in FY14.
We also expect RHFL to gradually improve its coverage ratio to 67%
in FY16 from current 52% in FY14.
Return ratios are expected to remain healthy with RoA at 2.6% over
FY14-16E. However RoE will remain below 20% till FY16E due to the
strong capital adequacy position.
We expect leverage to improve steadily and improve RoEs to +20%
levels, which are sustainable levels for RHFL in medium to long term.
Risk to our Estimates
Macroeconomic Risk: If the current positive economic scenario does
not sustain over the mid and long term then it may negatively impact
real estate sector, which in-turn could result in an adverse impact on
the earnings of RHFL.
Regulatory Risk: Part of the RHFL funding come from the refinance
from the NHB. Any adverse policy changes by NHB will have
negative impact on the earning of NHFL. Further any changes in risk
weight or interest rate cap by the NHB could negatively impact
earning of the company.
Concentration Risk: Approx 2/3rd of the RHFL loan book is from the
Tamil Nadu. Any sharp correction in real estate prices in the state can
negatively impact the loan growth of the company.
However, the company is steadily foraying into other states and thus
concentration risk will get negated over next few years.
14
August 21, 2014
Repco Home Finance
Financials
Exhibit 35: Income Statement
Y/E March (Rs mn) FY12 FY13 FY14 FY15E FY16E
Interest Earned 3,167 4,031 5,156 6,875 8,963
Interest Expenditure 2,023 2,656 3,248 4,339 5,649
Net Interest Income 1,144 1,374 1,908 2,536 3,314
Other operating income 21 26 186 204 218
Other Income 1 3 12 15 18
Net Operating Income 1,166 1,403 2,106 2,755 3,551
Core Operating Income 1,165 1,401 2,094 2,740 3,533
Employee Expenses 105 141 211 247 288
Other Expenses 63 73 153 186 146
Operating Expenses 168 214 364 434 434
Operating Profit 998 1,189 1,742 2,322 3,117
Depreciation 16 15 24 27 29
Provisions and Contingencies 165 106 227 340 480
Profit Before Tax 816 1,068 1,491 1,955 2,608
Taxes 202 268 390 557 756
Profit After Tax 615 800 1,101 1,398 1,852
Source: Company, Karvy Institutional Research
Exhibit 36: Balance Sheet
Y/E March (Rs mn) FY12 FY13 FY14 FY15E FY16E
Equity & Liabilities
Capital 464 622 622 622 622
Reserves Total 2,568 5,724 6,789 8,099 9,864
Net Worth 3,033 6,345 7,411 8,721 10,485
Long term borrowings 17,702 21,772 29,108 39,238 51,392
Other long-term liab & prov. 246 335 557 780 1,049
Non-current liabilities 17,948 22,108 29,666 40,018 52,440
Current liabilities 7,546 9,472 10,314 13,776 17,916
Total Liabilities 28,527 37,924 47,390 62,515 80,842
Assets
Fixed Assets 33 45 50 57 66
Non-current investments 81 81 124 124 124
Deferred tax assets 79 112 187 187 187
Long term loans and advances 26,291 33,206 43,637 57,402 74,398
Non-current assets 26,484 33,442 43,997 57,770 74,775
Short term loans and advances 1,799 2,295 3,044 4,350 5,632
Cash and cash equivalents 175 2,101 219 241 265
Other current assets 69 86 131 154 170
Current assets 2,043 4,482 3,393 4,745 6,067
Total Assets 28,527 37,924 47,390 62,515 80,842
Source: Company, Karvy Institutional Research
15
August 21, 2014
Repco Home Finance
Exhibit 37: Per Share Data and Valuation
Y/E March FY12 FY13 FY14 FY15E FY16E
No. of Shares (mn) 46.4 62.2 62.2 62.2 62.2
Earnings Per Share (Rs.) 13.2 12.9 17.7 22.5 29.8
Book Value / Share (Rs.) 65.3 102.1 119.2 140.3 168.7
BV/Share (Rs.) 65.3 102.1 119.2 140.3 168.7
Dividend Per Share (Rs.) N.A. 1.10 1.20 1.20 1.20
Price/ Earnings (X) 442 442 442 442 442
Price/ BV (X) 33.4 34.3 25.0 19.7 14.8
Source: Company, Karvy Institutional Research
Exhibit 38: RoA Tree Analysis
Y/E March (%) FY12 FY13 FY14 FY15E FY16E
NII / Avg Assets 4.62 4.14 4.47 4.61 4.62
Other Income / Avg Assets 0.00 0.01 0.03 0.03 0.03
Operating Income / Avg Assets 4.63 4.14 4.50 4.64 4.65
Employee Exp. / Avg Assets 0.42 0.42 0.49 0.45 0.40
Cost to Income Ratio 14.69 15.56 18.95 17.00 19.00
Opex / Avg. Assets 0.68 0.64 0.85 0.79 0.88
Depreciation / Avg. Assets 0.07 0.05 0.06 0.05 0.04
Credit Cost 0.59 0.30 0.49 0.55 0.60
NPA Prov. / Avg. Assets 0.67 0.32 0.53 0.62 0.67
PBT / Avg. Assets 3.30 3.21 3.50 3.56 3.64
Effective Tax Rate 24.71 25.08 26.17 28.50 29.00
Tax / Avg. Assets 0.81 0.81 0.91 1.01 1.06
RoA 2.48 2.41 2.58 2.54 2.58
Leverage Ratio 10.63 16.73 15.64 13.95 12.97
RoE 22.31 17.06 16.01 17.33 19.28
Source: Company, Karvy Institutional Research
Exhibit 39: Growth Ratio YoY
Y/E March (%) FY12 FY13 FY14 FY15E FY16E
Net Worth 22.4 109.2 16.8 17.7 20.2
Loan Book 35.3 26.4 31.5 32.3 29.6
Borrowings 37.4 23.3 27.3 34.8 31.0
Total Assets / Liability 36.0 32.9 25.0 31.9 29.3
Net Interest Income 19.3 20.1 38.9 32.9 30.7
Other Income (83.1) 271.4 361.5 25.0 22.0
Employee expenses 45.5 34.2 49.4 17.5 16.5
Operating Expenses 35.0 27.4 69.9 19.2 46.0
Loan losses and Provisions 243.6 (35.9) 114.0 49.8 41.4
Profit Before Tax 3.0 30.8 39.6 31.1 33.4
Taxes (4.4) 32.8 45.7 42.7 35.8
Net Profit 5.7 30.2 37.6 27.0 32.5
Source: Company, Karvy Institutional Research
16
August 21, 2014
Repco Home Finance
Exhibit 40: Yields / Margins
Y/E March (%) FY12 FY13 FY14 FY15E FY16E
Cost of Fund - CoF 8.14 8.67 8.32 8.25 8.20
Yield On Fund - YoF 11.28 11.35 11.05 11.13 11.20
Net Interest Margin 4.65 4.16 4.51 4.65 4.65
Spread 3.14 2.69 2.72 2.88 3.00
Source: Company, Karvy Institutional Research
Exhibit 41: Asset Quality
Y/E March (%) FY12 FY13 FY14 FY15E FY16E
Gross NPA Ratio 1.36 1.48 1.47 1.30 1.20
Net NPA Ratio 0.94 0.98 0.71 0.55 0.40
PCR 30.6 33.7 51.6 57.7 66.7
Credit Cost 0.59 0.30 0.49 0.55 0.60
Source: Company, Karvy Institutional Research
Exhibit 42: Capital Adequacy Ratio
Y/E March (%) FY12 FY13 FY14 FY15E FY16E
Total CAR 16.5 25.5 24.5 23.4 21.2
Source: Company, Karvy Institutional Research
Institutional Equities Team Rahul Sharma
Head – Institutional Equities /
Research / Pharma +91-22 61844310/01 [email protected]
Gurdarshan Singh Kharbanda Head - Sales-Trading +91-22 61844368/69 [email protected]
INSTITUTIONAL RESEARCH
Analysts Industry / Sector Desk Phone Email ID
Mitul Shah Automobiles/Auto Ancillary +91-22 61844312 [email protected]
Parikshit Kandpal Infra / Real Estate / Strategy/Consumer +91-22 61844311 [email protected]
Rajesh Kumar Ravi Cement/ Logistics/ Paints +91-22 61844313 [email protected]
Rupesh Sankhe Power/Capital Goods +91-22 61844315 [email protected]
Asutosh Mishra Banking & Finance +91-22-61844329 [email protected]
Vinesh Vala Research Associate +91 22 61844325 [email protected]
Rajesh Mudaliar Research Associate +91 22 61844322 [email protected]
INSTITUTIONAL SALES
Celine Dsouza Sales +91 22 61844341 [email protected]
Edelbert Dcosta Sales +91 22 61844344 [email protected]
INSTITUTIONAL SALES TRADING & DEALING
Aashish Parekh Institutional Sales/Trading/ Dealing +91-22 61844361 [email protected]
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Pratik Sanghvi Institutional Sales/Trading/ Dealing +91-22 61844366 /67 [email protected]
For further enquiries please contact:
Tel: +91-22-6184 4300
Disclosures Appendix
Analyst certification
The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed
herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of
his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views
contained in this research report.
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