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
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
Source Company, CSEC Research
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
Source Company, CSEC Research
Source Company, CSEC Research
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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7000
8000
9000
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0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Co
st o
f U
nit
INR
'00
0
Shar
e o
f D
em
and
/Su
pp
ly
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
20.0
40.0
60.0
80.0
100.0
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 Company, CSEC Research
Source Company, CSEC Research
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
52
14 15 7 5 20
50
100
150
200
250
300
350
400
No
of
Bra
nch
es
Repco Serviced Taluka's in State
Deep presence in South India
52
14 15
7 52
0
10
20
30
40
50
60
No
of
Dis
tric
t o
ffic
es
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
Source Company, 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 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
5000
10000
15000
20000
25000
30000
35000
40000
FY 09 FY 10 FY 11 FY 12 FY 13
INR
mn
Loan Book
0
2000
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
Source Company, CSEC Research Source Company, CSEC Research
Source Company, CSEC Research Source Company, CSEC Research
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
Source Company, CSEC Research
Source Company, CSEC Research
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
Source Company, CSEC Research
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
Source Company, CSEC Research
Source Company, CSEC Research
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
Particulars FY 12 FY 13 FY14E FY15E
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
%
Particulars FY 12 FY 13 FY14E FY15E
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
Particulars FY 12 FY 13 FY14E FY15E
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
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