repco home finance...major non promoter shareholders as on june 30, 2013 % shareholding carlyle...

52 Week High/Low INR 297/158

Bloomberg code REPCO IN

Reuters code RHFL BO

Issued Equity

(shares in mn) 62.2

Mkt. Cap in mn

Mkt. Cap in mn USD

INR 18,220

$ 297.12

Avg. Daily Vol. (‘000) 62.62

Avg. Daily Vol. (mn) INR41.2/$0.29

Shareholding Sep 13 Jun 13 Mar13 Mar13 Jun12

Promoters(%) 37.37 37.37 37.37 37.37 NA

FII (%) 6.26 6.28 5.55 5.55 NA

DII (%) 12.37 13.76 12.34 12.34 NA

Others (%) 44.00 42.59 44.74 44.74 NA

Pledge (% of

promoter

holding)

0.00 0.00 0.00 0.00 NA

Performance% 1M 3M 6M

RHFL 22.07 8.67 82.75

Sensex 6.09 5.98 9.04

Karthikeyan P +91-44-30007344 [email protected]

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RHFL Relative Sensex (RHS)

Niche presence, strong growth prospects Well built business model

Repco Home Finance (RHFL) is catering to the mortgage needs of the customers in LMI (low-and-

middle income) segment. Through 82 branches and 20 satellite centers, the company operates

primarily in South India. ~64% of branches are in Tamil Nadu and primarily in the under-penetrated

regions of tier-II and tier-III cities. a) Relatively lower ticket size (currently at INR 1.0mn) with adequate

instalment/income ratio (50%) b) Direct sourcing approach c) comfortable asset quality (GNPA at 1.67%

as at end 2QFY14) and d) adequate capital (CAR at 25.3%, entirely Tier I) should work in favor of

RHFL. ~84% of loan portfolio is towards individual loans; ~54% customers being self employed (either

professionals or non professionals).

Lean operating model, stringent risk management process

RHFL branches operate in tier II / III locations, with 3-4 employees and basic technology. Sourcing

through localized advertisement, loan camps and word of mouth with no intermediaries involved

enables a low cost operating model. Strict adherence to LTV (~65%) and robust risk management

system at every step of loan process has helped RHFL contain actual loss and fraud. Of the INR 52bn

disbursed since inception, loan losses have been contained at INR0.39bn or 0.08% of total cumulative

disbursements, corroborate RHFL strong asset quality control.

Return ratios to improve

Post IPO in March 2013, through which RHFL raised ~INR 2.7bn at INR 172/share, the company ROE

declined from 25% in FY12 to ~17% in FY13. Going ahead, leverage will improve as the company

grows its loan book and ROE is expected to trend at 20% only post FY15E. ROE (estimates of 15.5%

for FY14 and 16.4% for FY15), along with healthy earnings growth, the company is well poised to meet

its equity capital fund requirements for the next 3-4 years.

Valuation

The stock trades at 2.4X FY15E P/BV and 15.3X P/E FY15E. Backed by traction in business growth,

steady NIMs, and stable cost ratios, we expect core earnings growth to remain healthy. We value the

stock at INR 318 per share, implying a FY15E P/BV of 2.6X and FY15 P/E of 16.6X. We rate the stock

an OUTPERFORMER.

Valuation Summary

Y/E March ( INR mn) FY12 FY13 FY14E FY15E

Net Interest Income 1,032 1,255 1,659 2,005 Other Income 133 145 161 181 Pre Provisioning Profit 971 1,155 1,505 1,788 PAT 614 795 1,007 1,173 EPS 13.5 13.1 16.5 19.2 EPS growth (%) 5.7 -2.8 26.0 16.2 PE 21.8 22.5 17.8 15.3 P /BV * 4.5 2.9 2.7 2.4 Dividend Yield (%) 0.4 0.4 0.8 0.9 GNPA (%) 1.4 1.5 1.6 1.7 NNPA (%) 0.9 1.0 0.9 0.9

PCR (calc) 30.6 33.7 41.2 51.2 ROA (%) 2.8 2.2 2.4 2.7 ROE (%) 22.6 17.3 15.5 16.4 CAR – Tier I 16.5 25.5 24.1 21.6 ROE/PBV 4.1 6.0 6.5 7.2

* adjusted for uncovered loan losses and intangible assets

Sensex Nifty 20,929 6,220

30 October 2013

Repco Home Finance Sector: Housing Finance/Small cap

30 October 2013 Initiating Coverage

Background: Repco Home Finance Limited (RHFL) is a low to medium ticket size home loan financing company predominately based in tier II / III

cities of southern India. Promoted by the State-owned Repco Bank Ltd in 2000, RHFL presently has 102 branches and satellite centers of which 91 are located in the Southern market. Repco has grown from strength to strength with its loan book clocking 38% CAGR (FY09-FY13) and stood at INR ~40.35bn at the end 2QFY14. RHFL average loan ticket size is at INR 1mn, while client base stood at 45409. RHFL maintained a healthy NIM of ~4%, along with GNPA at 1.67% and NNPA at 0.92% as of 2QFY14.

Price: INR 294 Target Price: INR 318 OUTPERFORMER

Company Description Repco Home Finance Limited (RHFL), incorporated in the year 2000, is a subsidiary of the Repatriates Co-operative

Finance and Development Bank Limited (Repco Bank Limited) a Government of India enterprise with 76.8%

ownership. RHFL operates as a low to medium ticket size home loan financing company predominately based in tier

II / III cities and peripheral areas of tier I cities. RHFL as on 2QFY14 has 102 branches and satellite centres of which

nearly 90% are located in southern India.

History

Repco Home Finance – Product Portfolio

2000• Incorporated as Repco Home Finance Limited

2002• Received Certificate of registration from National Housing Board (NHB)

2007

• Investment by Carlyle

• Loan book crossed INR 5bn

2010• Rated "LA+(Stable)" by ICRA

2013• IPO listing of shares on NSE and BSE

• Loan for construction and Purchase of propertyDream Home Loan

• Loans of repairs, renovation and extension of property Home Makeover Loan

• Loans for outright purchase of plot for construction of housePlot Loan

• Loan for construction on land owned by borrower's parentsSuper Loan

• Loans to persons above 50 years where the loan repayment and disbursements are structured around retirement/pension income stream of the borrowers

Fifty Plus Loan

• Loan to Non-residents Indians for the construction and purchase of houses in India .

NRI Housing Loan

• Loans against Mortage of immovable property for such purposes as may be desired by the borrowers

Prosperity Loan

• Loans for purchase and/ or construction of non-residential and commercial property.

New Horizon Loans

Source Company, CSEC Research


Key Personnel

Mr.Varadarajan, Managing Director, has approximately 35 years of work experience in the banking industry. Prior

to joining Repco Home Finance in 2010, he was associated with Syndicate Bank in various capacities for a period of

23 years and with Repco Bank since 2001.

Mr. P. Natarajan, Executive Director, has around 30 years of experience in banking and financial services. Prior to

joining Repco Home Finance, he was a general manager at Repco Bank.

Mr. V. Raghu, Executive Director, holds a master’s degree in economics from Birla Institute of Technology &

Science and an MBA degree as well. His prior work experience includes a stint at NHB as a General Manager and

stint with RBI as Research Officer.

Major non promoter Shareholders as on June 30, 2013 % Shareholding

Carlyle (First Carlyle Growth VI) 17.74

WCP Holding III 9.96

Creador I, LLC 7.46

SBI Emerging Business Fund 3.70

Nomura India Investment Fund 2.00

Bangal Finance & Investment 1.22

Reliance Capital 1.22

SBI Magnum Balanced Fund 1.13

Citigroup Global Markets 1.09


About Repco Bank

The Repatriates Co-operative Finance and Development Bank Limited (Repco Bank) was initially registered as a

cooperative society on September 9, 1969 under the Madras Cooperative Societies Act, 1961. With the enactment of

the Multi-State Cooperative Societies Act, 2002 and in accordance with the relevant provisions thereof, it was

registered under the Multi-State Cooperative Societies Act, 2002. Government of India owns 76.8% in the bank. The

bank currently operates in the states of Tamil Nadu, Andhra Pradesh, Karnataka and Kerala and the Union Territory

of Puducherry through a network of 85 branches.

Shareholding pattern as on March, 31st

2013

Shareholders Share Capital Amount (INR mn) % of Share holding

Government of India 763.2 73.33

Government of Tamil Nadu 30.3 2.91

Government of Andhra Pradesh 17.9 1.73

Government of Kerala 6.1 0.59

Government of Karnataka 1.7 0.17

Repatriates 221.5 21.28

Total 1040.8 100

Key Metrics - Repco Bank (INR mn)

FY09 FY10 FY11 FY12 FY13

Deposits 17840 22940 29750 40350 50880

Advances 12420 16140 22640 30260 39170

Total Business 30260 39080 52390 70610 90050

Profit After Tax (PAT) 300 440 560 730 860

Credit Deposit Ratio (%) 70 70 76 75 77

Number of Branches 54 63 74 75 85

Gross NPA 421 640 747 489 609

Gross NPA (%) 3.38 3.93 3.29 1.62 1.56



Industry Overview

Nascent mortgage penetration + improving demographics to ensure steady growth

Mortgage constitutes ~50% of total retail credit in India and has historically grown at ~2.2x real GDP growth. This is

considered as one of the safest forms of lending given low default rates, as mortgage industry in India is

characterized by the first-time home borrower primarily in working class group (average age of 30-35years) and

limited liability. Increasing urbanization, housing shortage, favorable demographics and rising income levels are some

of the key drivers of housing demand. Further, India’s mortgage penetration is currently low at ~10%, versus 20-40%

penetration in Asian nations and almost half of China, thereby offering immense potential for penetration and growth.

CRISIL expects mortgage finance portfolio to grow at 19%CAGR during FY13-FY15E, leading to an estimated

housing finance market size of INR 115bn.

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45%

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INR

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0

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/Su

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Share of Demand Share of Supply

Affordable Capital Value (Min) Affordable Capital Value (Max)

High Demand-Supply gap for housing units priced below INR 2mn

Source: Jones Lang LaSalle, CSEC Research

0.0

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60.0

80.0

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120.0

140.0

FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY14PFY15P

INR

bn

O/S Mortage

18% CAGR 19% CAGR

Income Pyramid and Urban Housing Opportunity

7.5% 6mn

Real estate boom focused on meeting the

need of higher income segments

Focus of Mainstream Market

14%

11mn

16%

13mn

- Can afford homes

between INR 0.8-1.3mn -INR 9.5tn housing and

INR 7.6tn financing opportunity.

Market Opportunity

62%

49mn

Number of Households

Monthly household Income (INR)

Source Industry Reports, CSEC Research

Loan Growth expected to remain buoyant Housing demand supply dynamics for various income groups

Source Deloitte, CSEC Research

Greater than 25,000

15,000 to 25,000

10,000 to 15,000

Less than 10,000

Housing Finance Industry – Porter Analysis

Source CSEC Research

HFCs gain market share and hence drive above industry average growth

Within the overall financing mix, Housing Finance Companies (HFCs) have been gaining market share relative to

banks in overall disbursements, owing to its mono-line business along with domain expertise and better customer

service. Even on asset quality front, HFCs entail lower GNPA at ~1% as compared to the banks. As per ICRA,

outstanding mortgages of HFCs grew by 26%YoY in 1QFY14 as compared 17%YoY for banks, while overall

mortgage finance grew 20%YoY.

NHB refinancing to aid borrowing cost

National Housing Board (NHB) offers various schemes under which it re-finances the banks and HFCs. Most of these

schemes are designed to encourage lending in semi-urban, rural areas and periphery of urban areas where ticket

sizes are generally low. Given the design of the schemes, small HFCs (Repco, Gruh & Can Fin Homes) have been

the disproportionate beneficiaries of the low cost funds released by NHB. In addition, they aid in reducing the Asset

Liability Management (ALM) mismatches on their balance sheets and eventually help in reducing the cost of

borrowings.

NHB refinancing schemes

Golden Jubilee Rural Housing

Rural Housing Fund (RHF)

Urban Low Income Housing

Liberalized Refinance Schemes

Energy Efficient Housing Scheme

Purpose Refinance rural

housing Refinance to economically

weaker sections

Refinance to low income housing in

urban areas Refinancing to homes

using solar

Loan size Less than INR 1.5mn Less than INR 1.5mn Less than INR

1.0mn

Any (Concessional rates to loans

below INR 0.5mn) Upto INR 50,000

Location Rural/Urban Rural Urban Rural/Urban Urban

Tenure 1-15 years 3-7years 5-15years 1-15years 1-15years

Interest rate Floating/Fixed

Fixed 6.5%(loans < INR 0.2mn) 7% (loans INR 0.2-0.5mn) 7.5%(loans INR 0.5-1.5mn)

Fixed (Spread cap of 250bps) Floating/Fixed Fixed

Borrowers Any Economically weaker

section(EWS) Annual income less

than INR 0.2mn Any

Any (efficiency certificate needed)

0%

1%

2%

3%

4%

FY 10 FY 11 FY 12 FY 13

GNPAs in Retail Housing Loans

All Banks PSBs HFCs

41% 43% 44% 46% 47%

59% 57% 56% 54% 53%

0%

20%

40%

60%

80%

100%

120%

FY 10 FY11 FY12 FY13 FY14P

HFCS Banks

Increasing market share of HFCs in disbursements

Source ICRA, CSEC Research

Source NHB, CSEC Research

HFCs better placed than peers

Source CRISIL, CSEC Research

Conducive growth environment given government participation

According to estimates of the Technical Group constituted by Ministry of Housing and Urban Poverty Alleviation, the

urban housing shortage at the end of 11th five-year plan is estimated at 18.7 million units. Nearly, 95% of this

shortage pertains to the Economically Weaker Section (EWS) and Low Income Group (LIG group). The top 10 states

account for ~75% of this shortage. In order to stimulate housing demand, particularly in lower and middle-income

groups the government has announced various supporting measures in the budget such as (a) increasing the limit of

indirect finance under priority sector from INR 0.5mn to INR 1mn (b) setting up Credit Guarantee Trust Fund to

ensure better flow of institutional credit for housing loans and (c). Provisions under Rural Housing Fund (RHF)

increased from INR 40bn to INR 60bn. This apart, government participation (via affordable housing schemes, interest

rate subventions and other financial and tax incentives) should also help improve housing finance growth in India.

Recent regulatory changes to support growth

In a marked shift of stance, NHB relaxed lending norms for the residential real estate sector. This follows May 2013

RBI policy statement wherein the central bank had remarked that risks associated with residential lending are lower

and hence, there was a case of relaxation in some norms. This apart, NHB had also relaxed ECB norms for

affordable housing loans. Overall the measures (enumerated in tabular form below), should help bring down the cost

of funds for both the developers and mortgage borrowers.

Key regulatory changes and its impact

Regulatory Changes Impact Comments

Reduction in risk weights for home

loans in ticket sizes > INR 2mn Positive

Lower risk weights would translate into higher regulatory capital adequacy for the

lenders. Thus with the same capital base, the lenders can achieve a much larger

portfolio growth.

Creation of separate classification

of Residential-Commercial Real

Estate (CRE) with lower risk

weights and provision norms Positive

Increase in the portfolio yields if the lenders were to shift the portfolio in favour of

builders of residential projects With a lower standard provisioning requirement for

CRE-RH, there could be some reduction in the credit costs.

Advisory against subvention schemes (20:80) and upfront disbursal of loans for under construction property

Long term

positive/Negative

in short term

May reduce over-leveraging as well as reduced risk on the developer Reduce financial flexibility of the borrowers and thus deferment of purchase

decisions.

Allowed to raise public deposits of up to 10 years Positive

Help in better Asset-Liability Management (ALM) for HFCs, whose assets are growing. Help HFCs to go in for a much longer-term lending.

Source NHB, RBI, CSEC Research

2.27 0.99

0.53

14.99

Shortage of Housing units (mn)

Dilapidated Houses KatchaHomeless conditions Congested Houses

4.7

55.1 5.1

4.5

4.74.8

4.9

5.1

4.2

4.4

4.6

4.8

5

5.2

Housing Affordability Index

Source NHB, CSEC Research

Source Industry Reports, CSEC Research

Investment Rationale

NBFC peers – No direct competition

With several NBFCs and banks, operating in the housing finance space, RHFL is strategically targeting markets and

customer segments that are relatively underpenetrated. The key target markets of the company are in tier II and tier

III cities and at the peripheral areas of tier I cities. As on 2QFY14 RHFL had 102 branches and satellite centres

catering to these markets. Company has a diversified customer mix and is not overly reliant on the salaried class,

which is highly competitive market segment.

Difference based on customer segment targeted- HFC peers

Criteria Repco Home HDFC LIC Housing Can

Fin

Dewan

Housing

Gruh Finance

Presence

Metro outskirts, Urban &

Semi Urban Metro & Urban

Urban & Semi

urban

Urban, Semi

urban & rural

Income Group

Low and Middle income

group

Provides finance to middle and upper

middle income

Across different

income levels

Lower income

group

Customer

Segment

Salaried & Self employed

(Professionals & Non

professionals)

Salaried and

Professionals

~60% salaried,

rest self employed

Broad based customer mix - Self employed to drive loan growth

RHFL has a diversified mix of borrowers, which includes both salaried and non-salaried segments. Non-salaried class

is highly underpenetrated and relatively less competitive and thus offers better yields. Loans to salaried and non-

salaried Self Employed Professional (SEP) and Self Employed Non-Professional (SENP) borrowers constituted

46.0% and 54.0% (at the end-2QFY14), of loan book respectively. The company has successfully penetrated into

non-salaried segment, owing to its customized approach and personal credit appraisal and evaluation process.

51.00%

33.50%

15.50%

Self employed Casual Labor Salaried

High % of self employed in total workforce

46% 44% 45% 47% 47%

54% 56% 55% 54% 53%

0%

20%

40%

60%

80%

100%

120%

FY 09 FY 10 FY 11 FY 12 FY 13

Salaried Non Salaried

Self employed key target segment of Repco



Source CSEC Research

Higher brand recognition in South India, Huge scope for geographic expansion

RHFL has 102 branches and satellite centres as on 2QFY14 of which ~90% are located in southern India. Within

southern market, ~63% of outstanding loans and 51% of branches are in the state of Tamil Nadu followed by Andhra

Pradesh, Karnataka, and Kerala. The company is looking to add 10-15 branches every year to establish a strong

foothold in the existing territories, even as expanding into newer tier II / III cities. In states such as Maharashtra,

Gujarat and Karnataka which have large population even at the taluka level; offer immense potential for branch

expansion.

Loan Origination – Direct Sourcing Approach (DSA) with no intermediaries involved

RHFL marketing strategy focused on direct and localized advertising. Loan camps, Customer walk-ins and referrals

from existing customers are the key sourcing channels used by RHFL. Amongst, the three, loan camps are primary

channel for sourcing and constitute ~60% of the total loans sourced. Promotions for loan camps are done by

circulation of pamphlets and a print advertisement through the local newspaper 2-3 days prior to the camps. The

major incentive for customer to attend the loan camp is quick in-principal approval and waiver of administrative fees

of 0.5%. RHFL does not use marketing intermediaries to communicate with or service its customers.

Customer Walk-in Loan Camp Referral Clients

Localized Advertisement

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400

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Repco Serviced Taluka's in State

Deep presence in South India

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14 15

7 52

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60

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Districts No. Repco offices at Districts

Huge scope for expansion

In-house Marketing Strategy

Source Company, State Government websites, CSEC Research Source Company, State Government websites, CSEC Research


Stringent credit appraisal enables stable asset quality

Since, RHFL lends in non-salaried segment in tier 2, tier 3, and peripheries of tier 1 cities the company follows

structured and standardized credit approval process, wherein branch employee is responsible for sourcing, credit

appraisal, assessing credit worthiness, disbursing loans as well as in monitoring repayment and collections. Sanction

powers are limited to the central level where a team of credit officers and legal officers authorize the loans after due

diligence. RHFL disburses loan, which are in strict adherence to the following metrics: loan to value (LTV) 65% and

income to instalment (IIR) 50% in FY13. Implementation of such stringent quality control measures has helped RHFL

contain actual loss and fraud. Of the INR52bn disbursed since inception, loan losses have been contained at

INR0.39bn or 0.08% of total cumulative disbursements corroborate RHFL stringent asset quality control.

Smaller ticket size

Banks and large HFCs are mainly present in metros and urban areas, their ticket sizes followed the rising property

prices, this has left the non- salaried as well as tier-2 and tier-3 market open to small HFCs who have the capabilities

to operate in this segment. Given its direct customer contact, personalized services to customers and robust credit

appraisal, RHFL has the scope to operate profitably in the segment. This apart, ~40% of housing shortage is

attributed to the low and middle-income segment, thereby offering significant potential for growth.

Personal Interview

Through review of documents & CIBIL checks

Scrutiny of property documents & visit to property

Visit to business & residential premises; employment checks

Technical valuation report

Independent legal opinions

Branch level process

Loan sanction order to borrower

Verification & submission of original title deeds as security

Loan & security document execution & registration

Loan disbursement (progress linked for under construction)

Scrutiny by credit officer

Approval by sanctioning authority

Appraisal note, evaluation summary

Loan amount based on LTV & IIR

Credit score linked interest rate

Head office level process

Through Branch

0.70.81

0.890.98

0

0.2

0.4

0.6

0.8

1

1.2

FY 10 FY 11 FY 12 FY 13

Repco Average Loan Size (INR mn)

1.7

2.15

1.7

1.3

0.9

0.4

0

0.5

1

1.5

2

2.5

SBI HDFC LIC Housing

Can Fin Homes

Dewan Housing

Gruh Finance

Average Loan Size (INR mn)

Two tier credit appraisal mechanism


Source Company, CSEC Research Source Company, CSEC Research

Financials

Strong growth in loan book drive earnings

RHFL registered a strong loan book growth of ~38%CAGR during FY09-FY13; the outstanding loan book stood at

INR 40.35bn at the end 2QFY14. The growth in loan book was largely led by sanctions and disbursements, which

grew a healthy 28%CAGR and 29% CAGR respectively during FY09-FY13. The entire loan portfolio of RHFL is of

retail loans, with individual loans and loans against property (LAP) at 83.7% and 16.30% of the overall loan portfolio

at the end 2QFY14. The strong growth in loan book is substantiated by healthy growth in net profit, which grew

31%CAGR (FY09-FY13). Going forward, RHFL strategy to strengthen its focus in the tier 2 and tier-3 cities along with

improving economies of scale should augur well for loan book growth.

Lean operating model

RHFL lean branch model with 3-4 employees/branch and location in tier II / III and peripheries of tier I where rentals

are low, ensured that the company is able to keep costs under control. At the same time, limited technology

requirement, low administrative costs due to centralized credit approval mechanism and direct business sourcing

should also help the company maintain stable costs while improving scalability.

0

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15000

20000

25000

30000

35000

40000

FY 09 FY 10 FY 11 FY 12 FY 13

INR

mn

Loan Book

0

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4000

6000

8000

10000

12000

14000

Sanctions Disbursements

INR

mn

FY 09 FY 10 FY 11 FY 12 FY 13

CAGR 28% CAGR 29%

89%

5% 6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Interest Expenses Employee expense

Other expense

Cost Composition

6.40%

5.72%

6.62%

6.09%5.99%

5.20%

5.40%

5.60%

5.80%

6.00%

6.20%

6.40%

6.60%

6.80%

FY 09 FY 10 FY 11 FY 12 FY 13

Operating Cost / Income



Liablity management through stable borrowing mix

RHFL has access to a slew of funding sources including bank loan, refinancing from NHB and loan from Repco Bank.

RHFL is eligible for refinance under various schemes of NHB. As on FY13, NHB refinance constitutes ~37% of total

borrowings. RHFL has one of the largest proportions of NHB funding (next only to Gruh) owing to its presence in tier

2 and tier 3 cities. This apart, Repco is also looking for other avenues of finance like issuing rated debt paper, NCD,

Fixed Deposit, and loan from multi-lateral agencies to minimize the cost of funding and strengthen its balance sheet.

Furthermore, ICRA has recently upgraded the long term rating assigned to the term loans from banks availed by

RHFL from [ICRA]A+ to [ICRA] AA-; this should augur well to avail cheap credit from banks and financial institutions.

Net Interest margins stable aided favorable liabilty mix

With RHFL operating in the high risk low and middle income (LMI) segment, yields on the loan book are higher as

compared to its peers. RHFL margins have been healthy and have hovered ~ 4% mark; this can attributed to higher

borrowings from NHB at an average cost of ~8%. Recent rating up gradation and the fact that only ~64% liabilities of

RHFL are in floating nature as against 100% assets that are floating in nature should help maintain stable margins.

However, with interest rates going up (consensus estimate of 25-50bps hike in FY14), the base rate is bound to rise.

RHFL has limited flexibility to pass on increase in cost of funds and hence there might be pressure on the NIMs in the

short term.

52.50%

56.40%

48.30%

47.20%

36.60%

0%

20%

40%

60%

80%

100%

120%

FY 09 FY 10 FY 11 FY 12 FY 13

NHB Banks Promoter

8.20% 8.59% 8.34%9.42% 9.57%

10.77%

12.96%12.28% 12.52% 12.32%

4.50%5.40% 4.90%

4.23% 3.95%

0%

2%

4%

6%

8%

10%

12%

14%

FY 09 FY 10 FY 11 FY 12 FY 13

Cost of Funds Yields on advances NIM

Diversified liability mix



Business model lends itself to seasonal variation in asset quality

As against stable NPAs reported by large HFCs, the NPAs of RHFL are volatile in nature as non-salaried customers,

who don’t necessarily make timely payments, constitute ~ 53% of the overall loan portfolio. Further, the management

also pointed out that the seasonsal variation in NPAs is considered a norm and nothing much to worry about as

incomes of self employed borrowers are volatile and lumpy in nature and the same is reflected in the quarterly NPA.

RHFL stringent credit aprraisal mechanism and company’s ability to sustain net NPAs ~1% on an annual basis lends

credence to the management and provides comfort on asset quality.

Capital adequacy well above regulatory norms

Post IPO in March 2013, through which RHFL raised ~INR 2.7bn at INR 172/share, RHFLs total capital adequacy

(CAR) inched up from ~16% to a much comfortable level of 25.5% consisting entirely of Tier 1 capital and well above

regulatory requirement of 12%. With healthy ROA of 2.2% and ROE of ~17.30% (excluding money raised in IPO),

Repco Home Finance is adequately funded to meet the business needs for the next four years.

25.0%

21.1%

18.2%16.5%

25.5%

0%

5%

10%

15%

20%

25%

30%

FY 09 FY 10 FY 11 FY 12 FY 13

CRAR


2.00% 2.60% 2.80% 2.80% 2.20%

19.30%

25.20%26.60%

22.60%

17.30%

0%

5%

10%

15%

20%

25%

30%

FY 09 FY 10 FY 11 FY 12 FY 13

ROA ROE

2.82%

1.85%

3.22%

1.21%

2.24%

1.76%

2.83%

1.37%

2.58%

2.12%

2.94%

1.48%

2.22%

1.67%2.39%

1.42%

2.57%

0.88%

1.75%

1.28%

2.24%

0.95%

1.97%

1.59%

2.32%

0.99%

1.52%

0.92%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

Gross NPA Net NPA



Outlook

Loan book growth to remain healthy

Loans to housing finance companies with ticket size not exceeding INR 1.5mn qualify for affordable housing and

priority sector lending for banks; with RHFL’s target range, falling under this category the company is well poised to

tap growth opportunities in this space. The demand for housing among non-salaried, as well as in tier 2 & tier 3 cities

remains strong; RHFL expansion plan to strengthen its foothold in the southern region by entering into under

penetrated markets, coupled with expansion into newer geographies should drive the overall loan book. During FY13-

15E loan book is expected to grow at 30% CAGR.

Moderation in Margins; NHB 2% spread cap on refinance to impact NIMs

Recently, National Housing Bank (NHB) has made changes in its refinance schemes and imposed a spread cap of

2% on the refinance availed under the Rural Housing Fund (RHF) for households with annual income of less than

INR 0.2mn. Borrowings from NHB stand at 35% and that under RHF stands at 15% of overall borrowings for RHFL.

As the spread cap is not retrospective, impact on the spreads will be on future borrowings under this window. If the

company chooses to do business with a 2% cap, the spreads are likely to compress by ~40bp over the next 2-3

years. However, management indicated that they might refrain from using this window as doing business at 2%

spreads is not feasible for the company.

Healthy loan book growth and cost control to aid profitability

Earnings CAGR of 22% over FY13-15E will be driven by strong loan growth, stable cost ratios and improving

operating leverage. RHFL branches operate in tier II /III locations, with 3-4 employees and basic technology.

Sourcing through localized advertisement and word of mouth with no intermediaries involved enables a low cost

operating model, which is visible in cost ratios over FY09-13. Net interest income (NII) is expected to grow at

26%CAGR FY13-15E on the back of healthy spreads. Other income, however, would lag NII growth, owing to low fee

and waivers offered by the company.

Return ratios to improve

Post IPO in March 2013, through which the RHFL raised ~INR 2.7bn at INR 172/share, the company ROE declined

from 25% in FY12 to ~17% in FY13. Going ahead, leverage will improve as the company grows its loan book and

ROE is expected to trend at 20% only post FY15E. ROE (estimates of 15.5% for FY14E and 16.4% for FY15E), along

with healthy earnings growth, the company is well poised to meet its funding requirements for the next 3-4 years.

Asset Quality

Given, RHFL presence in non-salaried segment asset quality has a season pattern, with Q1 and Q3 being weaker

quarters. However, strict adherence to LTV (~65%) and robust risk management system at every step of loan

process has helped RHFL contain actual loss and fraud. Of the INR 52bn disbursed since inception, loan losses have

been contained at INR0.39bn or 0.08% of total cumulative disbursements, corroborate RHFL strong asset quality

control. Further, the management also reiterated to sustain GNPA and NNPA at ~1.5% and NNPA ~1% respectively

(on an annual basis) and improve PCR to ~50% over a period.

Valuation

Since April 2013, RHFL has traded between 1.4X to 1.9X its 1-year fwd adjusted book value and between 8.6X to

10.8X P/E of its 1 year fwd earnings. The stock trades at 2.4X FY15E P/BV and 15.3X P/E FY15E. Backed by

traction in business growth, steady NIMs, and stable cost ratios, we expect core earnings growth to remain healthy.

We value the stock at INR 318 per share, implying a FY15E P/BV of 2.6X and FY15 P/E of 16.6X. We rate the stock

an OUTPERFORMER.

Valuation Metrics

Peers – Valuation- Standalone Company NIM Cost/Income ROA ROE

FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

HDFC 3.71 3.69 7.2 7.1 2.6 2.6 21.8 22.4

LICHF 2.3 2.4 14.1 13.5 1.4 1.5 22.1 21.8

Dewan 2.7 2.6 34.6 34.5 1.4 1.5 17.5 17.8

Gruh 4.5 4.5 21.8 21.8 2.8 2.9 30.1 30.3

Tier-1 P/E P/BV Div Yield (%)

FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

HDFC 10.4 9.3 22.5 19.2 4.5 4.0 2.7 3.0

LICHF 12.4 12.3 8.8 7.3 1.5 1.3 1.9 2.1

Dewan 9.6 10 3.9 3.6 0.6 0.5 2.1 2.6

Gruh 14.1 14.2 23.3 18.8 6.6 5.5 1.1 1.2

Risks

Non-salaried portfolio may not only improve yields but it might increase slippages, which in turn would affect

the profitability of the company and act as a barrier against the growth of the company.

The asset book has excessive dependence on Tamil Nadu (~63%), any slowdown in the mortgage market

as a whole in South India, would affect RHFL growth.

RHFL’s borrowings are skewed towards NHB; strong future growth would require looking for other avenues

of finance like NCD, Fixed Deposit, and loan from multi-lateral agencies. Consequently, proportion of NHB

refinancing might decline, thus margins will moderate in the long term.

RHFL is regulated by the National Housing Bank (NHB), a wholly-owned subsidiary of the Reserve Bank of

India (RBI). Adverse regulatory changes related to risk weights and cap on the interest spread will negatively

impact the growth and profitability of RHFL.

Source Bloomberg, CSEC Research

Financials Standalone

Income Statement (Abstract)

INR(million)

Particulars FY 12 FY 13 FY14E FY15E

Interest income 3,055 3,912 4,892 6,360

Interest expense 2,023 2,656 3,233 4,355

Net interest income 1,032 1,255 1,659 2,005

Growth (%) 20.1 21.6 32.1 20.9

Other income 133 145 161 181

Total Income 3,188 4,057 5,053 6,540

Staff Costs 105 141 183 240

Others 89 104 132 157

Op. Expenses 194 245 315 397

Pre-provision Profit 971 1,155 1,505 1,788

Growth (%) 18.7 19.0 30.2 18.8

Provisions 155 92 105 151

PBT 815 1,063 1,400 1,637

Provision for Tax 202 268 393 464

PAT 614 795 1,007 1,173

Growth (%) 8.1 29.6 26.6 16.5

Balance Sheet (Abstract)

INR(million)

Particulars FY 12 FY 13 FY 14E FY 15E

Equity Capital 464 622 622 622

Reserves & Surplus 2,578 5,737 6,232 7,028

Net worth 3,042 6,359 6,854 7,650

Borrowings 24,860 30,647 33,333 44,895

Growth (%) 37.4 23.3 8.8 34.7

Other liabilities 635 932 6,937 8,167

Total Liabilities 28,537 37,938 47,124 60,712

Deferred Tax Asset (Net) 89 125 162 180

Cash & Balances 175 2,101 602 322

Advances 28,090 35,500 46,151 59,996

Growth (%) 35.3 26.4 30.0 30.0

Investments 84 85 81 81

Fixed assets 29 40 44 48 Other Current assets 52 69 86 86

Total Assets 28,537 37,938 47,124 60,712

Growth (%) 36.0 32.9 24.2 28.8

Per Share Ratios


EPS (Rs) 13.5 13.1 16.5 19.2

Earnings growth (%) 5.7 -2.8 26.0 16.2

PPP* / Share (Rs) 17.6 20.9 18.6 24.2

BV / share (Rs) 65.6 102.2 110.2 123.0

Adj BV / Share (Rs) 59.9 96.6 103.3 114.2

Div / Share (Rs) 1.3 1.3 2.2 2.6

Key Ratios

%


Gross NPLs 1.4 1.5 1.6 1.7

Net NPLs 0.9 1.0 0.9 0.9

Capital Adequacy 16.5 25.5 24.1 21.6

Tier I CAR 16.5 25.5 24.1 21.6

Yield on IEA*** 10.8 11.0 10.6 10.6

Yield on Advances 12.5 12.3 12.3 12.3

Cost of Funds 9.4 9.6 9.5 9.2

Net Interest Margin 4.2 3.9 4.1 3.8

Cost / Income 6.1 6.0 6.2 6.1

Provision/ Loans 0.30 0.23 0.18 0.19

Tax rates 27.4 30.7 30.0 30.0

ROA 2.8 2.2 2.4 2.7

ROE 22.6 17.3 15.5 16.4

Valuation Ratios


P / E 21.8 22.5 17.8 15.3

P / PPP* 3.0 2.5 2.0 1.6

P / BV 4.5 2.9 2.7 2.4

P/ABV$ 4.9 3.0 2.8 2.6

Dividend Yield 0.4 0.4 0.8 0.9

* PPP – Pre Provisioning Profit ***IEA – Interest Earning Assets $ Book value adjusted for uncovered loan losses

Cholamandalam Securities Limited

Member: BSE,NSE,MSE

Regd. Office: Dare House,2 (Old) # 234) N.S.C Bose Road, Chennai – 600 001. Website : www.cholawealthd irect.com

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Our Institutional Equit ies services are carried out in partnership with RCCR, a boutique Investment research and Corporate Advisory f irm founded by a

team w ith extensive experience in the Asset management industry.

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