August 21, 2014 Institutional Equities Repco Home Finance ... · PDF fileStock Information Market Cap. (Rs bn / US$ mn) 27/453 52-week High ... Source: Company, Karvy Institutional

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

[email protected]

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)


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

3

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


Exhibit 2: Disbursement growth is expected to remain

healthy


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 (%)


Exhibit 4: Region-wise loan book (1QFY15)


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


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 (%)


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 (%)


Exhibit 7: NII growth is expected to remain healthy


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%


Exhibit 9: Operational efficiency has improved gradually


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 (%)


Exhibit 11: Return ratio are best in class (%)


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 (%)


1.36 1.48 1.47

1.30 1.20

0.94 0.98

0.71

0.55

0.40


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


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


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


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


Exhibit 18: Mortgage to GDP ratio currently estimated at

12%, compared to 2% in 2002


Exhibit 19: Mortgages comprise the largest component in

banks’ retail portfolio


Exhibit 20: Urban Housing Shortage


Exhibit 21: Cities with a population > 1 mn


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


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%


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%


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%


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


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


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


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


Exhibit 39: Growth Ratio YoY


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


16

August 21, 2014

Repco Home Finance

Exhibit 40: Yields / Margins


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


Exhibit 41: Asset Quality


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


Exhibit 42: Capital Adequacy Ratio


Total CAR 16.5 25.5 24.5 23.4 21.2


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]

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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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For further enquiries please contact:

[email protected]

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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August 21, 2014 Institutional Equities Repco Home Finance ... · PDF fileStock Information Market Cap. (Rs bn / US$ mn) 27/453 52-week High ... Source: Company, Karvy Institutional