Repco Home Finance Limited: Long Term Play on housing finance

SECTOR: HOUSING FINANCE

Repco Home Finance Limited

STOCK INFO.

BSE Sensex:19,495

S&P CNX:5,868

BLOOMBERG

REPCO IN

REUTERS CODE

RHFL.BO

(

CRORES)

08 July 2013

Initiating Coverage

Buy

Rs260

(Rs)

Y/E MARCH

NII (Rs Cr.)

OP (Rs Cr.)

NP (Rs Cr.)

EPS (Rs)

EPS Growth (%)

ABV/Share (Rs)

P/E (x)

P/ABV (x)

RoE (%)

RoA (%)

Div yld (%)

STOCK DATA

FY13

125

116

102

21.0

2.6

2.4

FY14E

168

159

106

117

15.9

2.3

2.6

1.5

FY15E

214

203

136

135

12.4

2.0

2.8

1.9

We recommend to BUY Repco Home Finance(RHF) with a 12month

price target of Rs. 320, valuing it at 19X P/E and 2.75x P/BV on FY14E

estimated earnings.

INVESTMENT ARGUMENTS:

Long Term Play on housing finance:

RHF is a long term play on housing finance and housing shortage.

According to GoI, urban housing shortage stands at ~19mn units

and Rs 65,000 Cr, most of which comes from low income group.

RHF's business model caters to affordable housing finance needs

in Tier2 & 3 towns (average loan size at Rs 10 lac). Opprtunity size

is large as loan book stands at Rs 3500 Cr only.

(Look at about the

company)

Presence in under served markets:

RHF is largely focused on providing home loans in tier-II and tier-

III cities, which allow a large part of book to qualify as priority

sector lending (PSL) for banks. NBFCs operating in PSL segments

enjoy competitive advantages, as most private banks have a

shortage in meeting their PSL targets. Moreover, these under

served markets, have lesser competitive intensity as the model is

more collection based rather than EMI based.

Impeccable asset quality, high growth & good return ratios:

RHF has maintained impeccable asset quality (GNPA at ~1.25% &

cumulative write off since inception at 8 bps) despite growing loan

book at CAGR of 38% during the last 5 years at 42%. The company

maintains a very lean operating cost model (OpCost/branch at Rs

25 Lac vs Gruh's Rs 34 Lac), which ensures low breakeven point on

a new branch and also helps in maintaining high ROE(pre IPO money

ROE for FY13 at 23%).

Reasonable Valuations:

RHF trades at 2.3x/15x of FY14E ABV/EPS, which is at discount of

66% in P/ABV to closest competitor Gruh.We believe there is a high

probability of significant rerating of valuations owing to high

growth potential (FY13-FY15E PAT CAGR at 30%) ,long term business

potential and niche positioning in underpenetrated segment

within housing finance. Recommend BUY with a target of Rs 320

(19xFY14E EPS, 2.75x FY14E ABV) in 12 months.

(Look at Valuation

Table)

52-W High/Low Range (Rs)

Major Shareholders (as of Dec'10)

Promoter

Non Promoter Corp Holding

Public & Others

Average Daily Turnover(3 months)

Volume

Value (Rs Cr)

1/3 Month Rel. Performance (%)

1/3 Month Abs. Performance (%)

KEY FINANCIALS

Shares Outstanding (Cr)

Market Cap. (Rs Cr)

Market Cap. (US$ Mn)

Past 3 yrs NII Growth (%)

Past 3 yrs NP Growth (%)

Dividend Payout (%)

158/278

101000

2.05

19/45

18/51

6.22

1,678

280

Maximum Buy Price :

270

Rakesh Tarway

(rakesh.tarway@MotilalOswal.com); Tel: +91 22 30896679

Repco Home Finance Limited

About the company:

RHF is a professional housing finance company headquartered in Chennai which was

promoted by Repco Bank(Subsidiary of GoI) in year 2000 to cater to housing finance

needs of Tier2 and 3 towns. The company did an IPO in March 2013 to raise Rs 270

Crore at Rs 172 per share. Apart from Repco Bank,which holds 38% of equity Carlyle

also has 18% holding in RHF.

Repco Home Finance FY09

LOAN BOOK (RS CR)

991

PROFIT AFTER TAX (RS CR) 25

OPCOST/BRANCH (RS LAC) 15

GROSS NPA%

NET NPA%

NO OF BRANCHES

DISBURSEMENTS (RS CR)

NON SALARIED LOAN%

SALARIED LOAN%

AVG. TICKET SIZE(RS LAC)

1.0%

0.8%

428

54%

46%

FY10

1409

1.2%

0.9%

583

56%

44%

FY11

2076

1.2%

0.9%

916

55%

45%

FY12

2807

1.4%

0.9%

1042

53%

47%

FY13

3550

1.5%

1.0%

1167

53%

47%

CONCERNS:

Concentration Risk:

65% loan book is situated in Tamil Nadu. Any geopolitical risk associated with Tamil

Nadu will affect Repco accordingly.

Moderation In Margins:

Low cost housing finance players enjoy high margins (Gruh at 3%+, Repco at 2.75%. vs

HDFC spread of ~2.5%, SBI's probable spread at 2%+) even after they enjoy funding

facilities from Banks. SBI and other banks' push to reach out of traditional urban home

loan markets will hamper margins of players like Repco in the long term. Huge size of

opportunity will provide volume growth for everyone, which will mute the impact of

lower margins in the longer term.

VALUATION TABLE

VALUATIONS

HDFC

LIC HSG FIN

DEWAN HSG FIN

GRUH FIN

CANFIN HOMES

REPCO

P/E

FY14E

24.0

10.5

3.6

25.3

4.3

15.0

P/ABV

FY14E

4.5

1.7

0.6

6.7

0.6

2.3

ROE

FY13

28%

17%

34%

14%

17%

EPS CAGR

FY07-13

17%

21%

26%

29%

10%

38%

EPS CAGR

FY13-15E

18%

21%

24%

14%

22%

30%

08 July 2013

Financials and Valuation

Income statement

Y/E March

Interest Income

Interest Expenses

Net Interest Income

Change (%)

Non Interest Income

Net Income

Change (%)

Operating Expenses

Pre - Provision Profits

Change (%)

Provisions (excl tax)

PBT

Tax

Tax Rate (%)

Profit for Equity Sh

Change (%)

Equity Dividend (Incl tax)

Core (PPP*)

Change (%)

FY11

214

128

FY12

306

203

103

117

Repco Home Finance Limited

(Rs Cr)

FY13

391

266

125

140

116

107

116

FY14E

498

331

168

186

159

147

106

159

FY15E

615

402

214

236

203

188

136

203

Expect NII CAGR of

30%OVER FY 13-15

FY13-15 PAT CAGR of 30%

Balance Sheet

Y/E March

Equity Share Capital

Reserves & Surplus

Net Worth

Borrowings

Change (%)

Other Liabilities

Total Liabilities

Loans Given

Fixed Assets

Investments

Net Current Assets

Total Assets

FY11

195

242

1,834

2,076

(8)

2,073

FY12

257

303

2,514

2,818

2,807

(9)

2,810

FY13

572

635

3,113

3,748

3,550

174

3,737

FY14E

662

724

3,669

4,394

4,406

(25)

4,394

(Rs Cr)

FY15E

778

840

4,572

5,412

5,439

(41)

5,412

Expect 24% loan CAGR over

FY13-15

Ratio

Y/E March

Spread Analysis (%)

Avg. Yield on loans

Avg. Cost of Deposits

Spread

Profitability Ratios (%)

RoE

RoTA

Int. Expense/Int. Income

Non Int. Inc./Net Income

Efficiency Ratios (%)

Cost Income ratio

Emp. Cost / Operating Expenses

Loan Losses to Net income

Loan Losses to Advances

Asset-Liability Profile (%)

Loans / Borrowing Ratio

CAR

Asset Quality

GNPA

NNPA

GNPA % to GrossAdvances

NNPA % to Net Advances

FY11

12.3%

8.3%

4.0

26.0

3.2

20.9%

35%

0.98%

0.05%

1.13

1.21%

0.88%

FY12

12.5%

9.3%

3.2

22.6

2.5

29.9%

30%

0.00%

1.12

1.36%

0.95%

FY13

12.3%

9.5%

2.9

17.1

2.4

24.0%

42%

0.16%

0.01%

1.14

1.48%

0.99%

FY14E

12.5%

9.8%

2.8

15.6

2.6

21.2%

40%

0.21%

0.01%

1.20

20.2

1.50%

0.84%

FY15E

12.5%

9.8%

2.8

17.3

2.8

20.3%

39%

0.21%

0.01%

1.19

19.1

1.50%

0.70%

Asset quality to remain

stable

08 July 2013

Repco Home Finance Limited

Valuation

Y/E March

Adj Book Value (

)

Change (%)

Price-ABV (x)

EPS (

)

Change (%)

Price-Earnings (x)

Dividend Per Share (

)

Dividend Yield (%)

FY11

FY12

FY13

2.9

21.0

FY14E

111

2.4

15.9

4.0

1.5

FY15E

129

2.1

12.4

5.0

1.9

Reasonable Valuations

For more copies or other information, contact

Retail:

Vijay Kumar Goel

Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: reports@motilaloswal.com

Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021

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Repco Home Finance Limited

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