17 May 2013
Update |Sector: Banking
Repco Home Finance
CMP: INR 200
to
remain
Management meet takeaways; margins
stable/increase; asset quality to improve
(REPCO IN, Mkt Cap USD0.23b, CMP INR200, Not Rated)
We met Repco Home Finance’s Executive Director, Mr. V Raghu to understand the
company’s growth strategy, business outlook, competitive scenario and vision. Key
takeaways:
-
Housing finance market continues to remain buoyant especially
underpenetrated self employed segment, and by increasing its reach expects a
healthy 35%‐40% loan growth for next 2 years.
-
Likely Ratings upgrade: RHFL has approached rating agencies for a rating
upgrade, currently it commands A+ rating, however its rating is lower than its
peer due to high leverage. Post recent capital raising of INR 2.6bn, CAR stands at
25% coupled with strong parentage and sound fundamentals makes it a strong
contender for a rating upgrade.
-
Expects to maintain margins above 4% and spreads over 3%, RHFL will also
increase proportion of LAP to 20% (from existing 15%) of loan book that will
help the company to boost its overall yields.
-
Asset quality is likely to improve going forward, in line with improving situation
in states of Tamil Nadu & Andhra Pradesh. Management has also made some
operational changes and have strengthened the recovery process which has
started yielding results and the trend is likely to continue.
Housing finance market continues to remain buoyant expect healthy 35%‐40%
loan growth for next 2 years
‐
Repco has delivered a loan book CAGR of over 40% between FY08‐FY13.
Management believes that the housing market continues to remain buoyant;
especially the underpenetrated self employed segment which accounts for
~53% of loan book.
‐
Management is confident of the strong growth prospects and expects a healthy
loan growth of over 35%‐40% for next two years.
Well capitalized for growth; Post the recent capital raising (INR2.6b) the CAR
stand at 25% (largely Tier 1) which is sufficient to take care of the growth
requirements for next 2‐3 years.
1

Repco Housing Fin.
Loan growth continues to be strong
Well capitalized
Loan mix
Likely rating upgrade: Funding cost to come down and funding base to become
diversified
‐
Likely Rating upgrade: RHFL has approached rating agencies for a rating
upgrade, currently it commands A+ rating, however its ratings are lower
compared to peers due to high leverage & privately held company status.
‐
However post the recent listing, the company stands well capitalized with
capital adequacy of 25% and leverage of
~5x,
RHFL stands a strong chance of
rating upgrade to AA, which would cause reduction in cost of funds, diversify the
borrowing mix and enable it to tap low cost avenues like NCDs, CP etc.
‐
Expects to maintain margins above 4% and spreads over 3%. RHFL will also
increase proportion of LAP to 20% (from existing 15%) of loan book that will
help the company to boost its overall yields.
‐
Recent listing has helped RHFL in attracting funds at lower interest rates. There
have been instances where it has been able to get funds at 9.7% from large PSU
& as well as from private banks.
17 May 2013
2

Repco Housing Fin.
Borrowing Mix
NIMs(%)
Yield on assets & Cost of funds(%)
Asset quality likely to improve
‐
Repco’s NPL levels are higher than industry average due to its presence in self
employed segment (v/s other players who are largely focused on salaried
segment) as the cash flows of self employed individuals are uneven leading to
volatility in the asset quality.
‐
Although NPL levels are volatile, the actual loan loss to company are miniscule.
RHFL has written off only 0.04% (~INR 40mn) of the cumulative disbursements
made since its inception in year 2000.
‐
However the asset quality outlook is likely to improve as in the recent past
management has taken some corrective measures and shifted focus on
containing NPL levels by making some operational changes and aligning new
incentive structure which revolves around recovery.
‐
NPL levels in Tamil Nadu has improved in past 6 months due to improvement in
power situation, TN NPLs now accounts 0.83% of over overall NPLs of 1.48%.
RHFL is actively using the SARFASI window to recover loans and this has
significantly boosted the recovery process, the company has won ~90% of
cases in SARFASI.
17 May 2013
3

Repco Housing Fin.
Asset Quality (%)
Branch expansion: deepen presence in southern states and gradually expand in
other states
‐
RHFL will continue to expand the branch network as part of its strategy to
expand wider and deeper, however it will be done in a staggered manner with
15‐20 new branch additions every year.
‐
While the business from new states will grow at a healthy pace, south states will
continue to account for ~70% of business.
‐
Employee addition will be in line with business growth, RHFL as a stated policy
adds one employee for every INR100mn of additional business. Management
plans to increase the headcount from existing 300 to 900 over next 2‐3 years.
Branch Network
State‐wise portfolio break‐up (%)
NHB refinance for rural housing
-
RHFL has predominantly used National Housing Bank refinance (36% of total
borrowings as on March 2013) to fund its disbursements, while remaining was
from various SCBs and from parent, Repco Bank. Majority of RHFL as on March
2013 are in Tier II / Tier III towns and a significant portion of its portfolio
qualifies as rural housing finance, and eligible for low‐cost funding from NHB.
-
The cost of borrowing from NHB was about 8%, while the same from banks
stood at about 11%. As the company’s bank funds are generally linked to the
base rate any reduction in the systemic rates is likely to favorably impact the
company cost of bank funds.
-
Although the NHB funding will reduce as proportion to overall funding, but
company will continue to use NHB refinance window for the rural loans.
17 May 2013
4

Repco Housing Fin.
Focus on non‐salaried borrower segment where competitive intensity is miniscule
‐
RHFL primarily targeting markets that are relatively underpenetrated the key
target markets of company are in tier 2 and tier 3 cities and at the peripheral
areas of tier 1 cities.
‐
RHFL focuses on self employed segment and is not overly reliant on highly
competitive salaried class. Loans to salaried and non‐salaried borrowers are 47
% and 53%, outstanding loan book on FY13.
‐
The non‐salaried borrower segment comprising SEPs and SENPs, is under
penetrated and underserved by larger HFCs and banks. RHFL has been able to
successfully penetrate the non‐salaried segment given its direct customer
contact, tailored approach and personal evaluation processes followed during
credit appraisal.
‐
The competitive intensity is miniscule in this segment as most of the banks and
HFCs primarily caters to salaried segment, thereby ensures strong pricing power
to company.
Loan book Break‐up
Valued at 1.4x FY15E P/B; Not Rated
RHFL has delivered loan book CAGR of over 40% between FY08 and FY13,
with equally impressive earnings growth of 43% between FY08‐FY13. The
company has delivered average RoAs and RoEs of ~2.8% and ~22%,
respectively over FY08‐FY12. At CMP of INR200 stock is valued at 1.45x
FY15E P/B, and 10x FY15E P/E. We believe the multiple is inexpensive given
strong past track record of loan growth and earnings trajectory coupled
with strong future prospects.
17 May 2013
5

Repco Housing Fin.
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Repco Housing Fin.
No
No
No
No
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