Gruh Finance: Focused player with consistent track record

GRUH Finance

Initiating Coverage | Sector: Financials

GRUH Finance

BSE Sensex

25,696

S&P CNX

7,786

CMP: INR232

TP: INR295 (+27%)

Buy

The cash machine

Focused player with consistent track record



Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)/(USD b)

Avg Val(INRm)/Vol‘000

Free float (%)

GRHF IN

363.4

317/183

4/3/16

84.3/1.3

112/450

41.4



Urbanization and affordable housing are the mega trends that will translate into a

meaningful lending opportunity of INR9t over the next decade.

GRUH has a first-mover advantage in a large opportunity space and is a key

beneficiary of government’s thrust on affordable housing.

Consistent operating/financial performance and strong HDFC parentage has

fetched AA+ credit ratings. Presence in rural housing finance helps it avail cheaper

NHB funds aiding spreads.

Consistency+ Sustainability +Stability + Scalability =Premium valuation; 10-year

avg. RoE/RoA of +28%/+2.5%. Valuation reflective of uniqueness of business

model. Initiate with a Buy rating.

Financial Snapshot (INR b)

Y/E MAR

2016E 2017E 2018E

NII

4.2

5.3

6.7

PPP

4.0

5.0

6.4

PAT

2.5

3.2

4.1

EPS (INR)

7.0

8.8 11.3

EPS Gr. (%)

24.3 26.8 28.3

BV/Sh. (INR)

24.1 29.8 37.2

ABV/Sh. (INR) 24.1 29.8 37.2

RoA (%)

2.4

RoE (%)

31.9 32.8 33.8

Payout (%)

30.0 30.0 30.0

Valuations

P/E (x)

33.3 26.3 20.5

P/BV (x)

9.6

7.8

6.2

Div. Yield (%)

0.9

1.1

1.5

Shareholding pattern (%)

Jun-15 Mar-15

Promoter 58.6

58.6

DII

FII

3.1

12.3

2.5

12.7

Affordable housing a mega lending opportunity:

Large opportunity size, secured

nature of lending, favorable regulatory regime, limited competition from banks,

liability support from NHB makes the affordable housing finance segment

dynamics very attractive. While these factors have enabled HFCs to deliver

strong returns; in our view, government’s strong push to affordable housing via

its “Housing for all by 2022” scheme coupled with multiple long term growth

drivers makes the future much more promising for the affordable housing

finance segment specialist like GRUH. Approx 68% of India’s population lives in

rural areas, facing shortage of ~44m housing units as per our estimates; even if

half of the houses get institutional finance it translates into an INR9t financing

opportunity over the next decade.

GRUH has first mover advantage in large opportunity space:

Housing finance to

small-ticket segment (ticket size <INR1m) remains abysmally low, despite

regulators favoring small-ticket loans by allowing lower risk weight of 50% and

cheaper refinance options (NHB refinances at 7-9%). GRUH with three decades

of experience has a steep learning curve and has developed an operating model

suiting the unique challenges faced by this segment. In our view GRUH is likely

to be a key beneficiary of the large opportunities. We expect GRUH to clock a

+25% CAGR in loan growth over the next 10 years v/s a 27% CAGR over the last

decade.

Lower competition imparts pricing power; NHB refinancing and AA+ credit

ratings aid superior spreads:

GRUH’s strong presence in underserved areas

where competition is low imparts pricing power resulting in higher yields.

Further, NHB through its various schemes refinances banks and HFCs at 7-9% to

encourage lending in semi-urban and rural areas. Given the areas where GRUH

operates and the segments it targets, GRUH is a major beneficiary of these

schemes (NHB funds form 34% of the borrowings).

Jun-14

59.2

0.7

16.5

Others

26.0

26.2

23.6

FII Includes depository receipts

Stock Performance (1-year)

350

300

250

200

150

GRUH Finance

Sensex - Rebased

2 September 2015

GRUH Finance

Also, consistent operating/financial performance record with strong parentage has

fetched AA+ ratings. Combination of higher yields, high credit ratings and NHB

refinancing helps GRUH generate 3.5%+ spreads and 4%+ margins.

Lean operating costs and impeccable asset quality cornerstone of supernormal

profits:

Aided by lean operating costs (C/I ratio 15.8% (Q1FY16), in-line with large

HFCs), stable margins (4%+) and credit cost (<20bp over the next three years), GRUH

is likely to post 26% CAGR in net profit over FY15-18E; we expect it to report RoA of

2.4% and RoE of 34% by FY18E. Conservative lending practices such as a) LTV of 65%

and installment-to-income ratio of 50% and b) small developer/builder loan

portfolio have enabled GRUH to maintain stable asset quality, with gross

GNPL/NNPA of 0.52%/0.15% and coverage ratio of 72% (as of 1QFY16).

Superior and sustainable return ratios:

GRUH commands significant premium over

peers due to a) long track record of consistent financial/operating performance, b)

immense potential of scalability due to massive opportunity in the segment, c)

strong parentage of HDFC Ltd., d) best-in-class return ratios with a 10-year average

RoE/RoA of +28%/2.5% e) efficient use of capital (no dilution in the last 10 years), f)

flawless execution—NPLs never went above 2%, even during the worst of times.

We expect GRUH to continue to trade at premium multiples, led by its niche

business model, high capitalization, consistent execution, inherently high

profitability with the ability to sustain return ratios, and minimal asset quality

overhang—given a secured loan book. Ongoing downward trend in interest rates

could also prove to be a trigger for profitability. We initiate coverage with a

Buy

rating

and a target price of INR295, based on residual income model, which yields

an upside of 27% from current market price.

Exhibit 1:

Key

Operating Matrix (%)

Y/E March

Yields on loans

Cost of funds

NIMs

Cost / Income

GNPA

RoAE

RoAA

EPS (INR)

EPS Growth

BVPS (INR)

E: MOSL Estimates

2011 2012 2013 2014 2015

11.7 13.0 12.9 13.1 12.8

7.6

9.1

9.3

9.6

9.3

4.8

4.7

4.5

4.3

20.0 19.2 18.8 18.4 16.7

0.8

0.5

0.3

31.4 34.2 33.3 32.2 30.9

3.0

3.1

2.9

2.8

2.5

2.6

3.4

4.1

4.9

5.6

31.1 31.0 19.9 20.2 14.2

9.0 10.9 13.8 16.9 19.6

2016E

12.6

9.2

4.1

16.2

0.3

31.9

2.4

7.0

24.3

24.1

2017E

12.4

9.1

4.0

15.6

0.2

32.8

2.4

8.8

26.8

29.8

2018E

12.4

9.1

3.9

14.9

0.2

33.8

2.4

11.3

28.3

37.2

Exhibit 2:

Housing Finance Companies: Valuation metrics

CMP

(INR)

HDFC

LICHF

DEWH

IHFL

GRHF

REPCO

1,158

425

445

726

232

701

Tgt Price

(INR)

1,388

541

710

790

295

901

Upside

(%)

3yr EPS

CAGR

10.9

14.5

12.8

18.6

18.0

14.3

FY15

5.9

2.7

1.4

3.9

11.8

5.4

P/BV (x)

FY16E FY17E FY15

5.3

2.3

1.2

3.5

9.6

4.6

4.7

2.0

1.1

3.0

7.8

3.9

2.5

1.4

1.3

4.0

2.5

2.3

RoA (%)

FY16E

2.6

1.5

1.3

3.9

2.4

2.2

FY17E

2.6

1.5

1.3

3.8

2.4

2.1

FY15

25.5

17.5

15.1

30.8

30.9

15.9

RoE (%)

FY16E FY17E

23.6

20.2

15.6

32.3

31.9

24.4

21.3

17.3

33.5

32.8

17.5

19.2

Source: MOSL

2 September 2015

GRUH Finance

Affordable housing: A Mega lending opportunity

Urbanization and affordable housing are mega trends of the next decade



Massive opportunity emanating from urbanization and thrust on affordable housing.

In our view, will result in INR9t lending opportunity over the next decade.

GRUH likely to be a key beneficiary of Housing for all by 2022 scheme

Limited competition in the space leaves ample room for GRUH to expand

Massive opportunity emanating from urbanization and thrust on affordable

housing

Despite the mortgage industry growing almost 25x in the last 15 years (from

INR400b in 2000 to INR10t in 2015), the opportunity for housing financiers

continues to remain large owing to multiple growth drivers: a) Continued

urbanization ensuring strong housing demand in tier-2 and tier-3 cities, b) rising

income with increasing affordability, c) shrinking/nuclear families, d) tax incentives

and excessive slum development and housing shortage in urban areas resulting in

increased thrust on affordable housing.

Nearly 68% of India’s population lives in rural areas, which faces significant housing

shortage (43.7mn units, as per the working group on rural housing for the 12th Five-

Year Plan). One of the main reasons for this shortfall (besides high poverty) is the

lack of formal institutional financing mechanism and framework.

Exhibit 3:

: Total rural housing shortage at ~44m units

Factors

No. of households without houses - 2012

No. of temporary houses - 2012

Shortage due to congestion - 2012

Shortage due to obsolescence - 2012

Additional housing shortage arising between 2012-17

Total rural housing shortage

Shortage (million)

4.2

20.2

11.3

7.5

0.6

43.7

Source: MOSL

Exhibit 4:

Even if 50% units are financed, financing requirement at ~INR9t

Est. number of units financed (mn)

Average cost of rural house (INR mn)

Loan-to-value ratio

Average loan per house (INR mn)

Total financing requirement (INR bn)

21.9

0.6

70%

0.42

9,177

Source: MOSL

As per the Planning Commission, only 9% of the rural households sourced

institutional finance to build their houses in 2012. Even if 22m houses (50% of the

required houses) need funding with an average ticket size of INR0.6m (with 70%

LTV), this could be an INR9t+ opportunity over the next decade. In our view, players

in this space would continue to witness higher-than-system loan book growth over

the next decade as these mega trends translate into significant lending

opportunities.

2 September 2015

GRUH Finance

Housing shortage in India to increase to 114m by 2022 from 63m in 2012

Despite strong growth in housing supply in recent years, India still faces a shortage

of houses—especially in urban areas. In 2012, the housing shortage in urban India

was estimated at 18.8m units and at 44m units in rural areas. Nearly the entire

shortage was estimated to be in Economically Weaker Section (EWS) and Low

Income Group (LIG) segments of the population.

Exhibit 5:

Estimated housing requirement by 2022

Urban

(M units)

27.5

46.5

Rural

Total

(M units)

51.5

114.5

Source: MOSL, NAREDCO

Housing shortage in 2012

Requirement by 2022

Total

Industry experts estimate that housing requirement in India would increase to 114m

units by 2022 from 60m in 2012. Majority of the demand, ~68m houses or 60% of

the total demand, is expected to come from rural areas. Further, 50% of the housing

requirement would be in the LIG and Middle Income Group (MIG) segments.

Exhibit 6:

Housing requirement in 2022 by income group

Income group

EWS

LIG

MIG

HIG

% of housing need

Source: MOSL, NAREDCO

Exhibit 7:

Housing requirement in top 10 states by 2022

Urban housing requirment (Mn units)

Rural housing requirment (Mn units)

146

Uttar

Pradesh

Maharashtra

Bihar

Andhra

Pradesh

West

Bengal

Madhya

Pradesh

Rajasthan

Tamil

Nadu

Gujarat

Karnataka

Source: MOSL, NAREDCO

“Housing for all by 2022” -Government working towards reducing

affordability gap for EWS/LIG segment

Affordability gap is the difference between the price of a house and maximum

amount a household can pay. The task force on promoting affordable housing in

2012 estimated affordability gap for EWS segment at INR0.1-0.2m and that in LIG

segment at INR0.7-1.2m.

2 September 2015

GRUH Finance

Government under its “Housing for all by 2022” mission intends to plug this

affordability gap by providing 20m houses to the EWS and LIG in cities and small

towns of India by 2022.

Highlight of the scheme is that government would provide interest subsidy of 6.5%

on housing loans of tenure of up to 15 years to the EWS/LIG segment. As per our

calculations a 6.5% interest subsidy on an INR0.6m loan at 10.5% interest for 15

years; monthly EMI will reduce from INR 6,632/month to INR4,438/month that

translates into a monthly saving of INR2,194/month.

Exhibit 8:

Expected monthly savings on EMI

Loan Amount (INR)

Tenure (Years)

Interest rate (%)

Monthly EMI (INR)

EMI Savings/month (INR)

600,000.0

10.50%

6,632.0

600,000.0

4.00%

4,438.0

2,194.0

Source: MOSL

Based on the above calculations, interest savings over the tenure of the loan for

EWS segment (on loan of INR0.6m) is ~INR0.4m and for LIG segment (on loan of

INR1.5m) is ~INR1m, thus eliminating the affordability gap by providing interest

subsidy on housing loans.

Exhibit 9:

Interest subsidy scheme eliminates affordability gap

EWS (Loan of INR 0.6m)

w/o interest

subsidy

Affordability Gap (INR m)

Interest savings over 15 years (INR m)

Effective affordability gap

0.1-0.2

with interest

subsidy

0.1-0.2

~0.4

LIG (Loan of INR1.5m)

w/o interest

subsidy

0.7-1.2

with interest

subsidy

0.7-1.2

~1m

Source: MOSL

Further, to increase the addressable market size of the scheme, income ceiling for

EWS has been revised from INR0.1m pa to INR0.3m pa and the ceiling for LIG has

been hiked from INR0.3m pa to INR0.6m pa.

Banks’ reluctance to lend in this segment leaves ample space for niche HFCs

Banks have traditionally competed on lower interest rates while housing finance

companies have maintained their turf through better product offering and service

quality over the life of the mortgage. Although HFCs have lost their competitiveness

vis-à-vis commercial banks especially amongst the salaried class in metro areas, they

continue to dominate the small-ticket and self-employed segments across

geographies.

2 September 2015

GRUH Finance

Exhibit 10:

HFCs are steadily gaining market share in mortgage industry

HFC

Banks

77.9

75.1

73.0

69.9

67.7

66.2

64.1

64.2

63.9

22.1

FY07

24.9

FY08

27.0

FY09

30.1

FY10

32.3

FY11

33.8

FY12

35.9

FY13

35.8

FY14

36.1

FY15

Source: MOSL

Banks were especially aggressive in the housing finance space during 2004-2008 and

gained significant market share from HFCs. However, banks witnessed asset quality

stress in this space during the credit crisis of 2008-09 and have gone slow since then

while HFCs have steadily gained market share.

Exhibit 11:

HFCs have consistently grown much faster than banks

Banks Mortgage growth(%)

HFC Retail loan growth(%)

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Source: MOSL

Large banks and HFCs have ignored the self-employed segment due to

difficulty in credit appraisal

Banks and HFCs have ignored the self-employed segment due to difficulty in credit

appraisal, lack of proper documentation, intense KYC checks, NPL volatility and

aggressive follow-ups needed post disbursement. Realizing the vacuum and size of

opportunity, certain niche HFCs such as GRUH, REPCO and DHFL have made strong

inroads into this segment.

Exhibit 12:

76% of home loans by banks are in Urban areas

Rural

Semi-urban

18%

Metro

50%

Urban

26%

Metro

45%

Exhibit 13:

SBI’s 25% HL are in semi-urban & rural areas

Rural

Semi-urban

18%

Urban

30%

Source: MOSL, NHB

2 September 2015

Source: MOSL, NHB

GRUH Finance

Banks have largely focused on the salaried segment in metro and urban areas due to

ease of credit appraisal. Two key factors in credit appraisal for home loans are: a)

Ascertaining the repayment capabilities of the borrower and b) assessing the legal &

practical aspects of the property that is being financed.

While availability of long credit history and regular cash-flows make salaried class

the safest borrower class in terms of repayment capability, relatively clear property

titles in metro areas increase the ease of property appraisal. As such, commercial

banks as well as large HFCs continue to focus on the salaried segment in metro and

urban areas. This leaves a lot of room for the smaller housing finance players such as

Repco Home, Dewan and Gruh Finance, in self-employed segment even in metro

and urban areas, not to mention the low level of competition in tier-2 and tier-3

cities.

Exhibit 14:

Banks’ O/S credit in home loans (INR b)

FY12

FY13

FY14

Exhibit 15:

Banks’ disbursements in home loans (INR b)

FY12

FY13

FY14

<INR0.2m

INR0.2 to INR0.5m to INR1m to

INR0.5m

INR1m

INR2.5m

> INR2.5m

<INR0.2m

INR0.2 to

INR0.5m

INR0.5m to

INR1m

INR1m to

INR2.5m

> INR2.5m

Source: MOSL, NHB

Leaving ample room for niche HFCs such as GRUH

Banks’ focus on small-ticket loans has been restricted to priority housing, and they

have largely focused on urban areas for growth and cater to salaried and

professional customers who have banking access and CIBIL scores. While PSU banks

enjoy deep hinterland penetration, their organizational structure promotes non-

agriculture retail asset products largely in the urban areas.

Exhibit 16:

GRUH’s average ticket size is less than INR1m

2.4

2.3

1.9

1.2

0.8

0.2

IHFL

SBIN

HDFC

LICHF

Sundaram

Housing

DEWH

REPCO

GRUH

Mahindra

Housing

Source: MOSL

Banks and large HFCs’ disproportionate focus on the urban salaried segment has left

the non-salaried segment as well as tier-2 and tier-3 market open to anyone who

2 September 2015

GRUH Finance

has the capabilities to operate in that segment. This segment is characterized by low

ticket sizes and irregular cash flows. Smaller HFCs such as GRUH Finance and Repco

Home have operated profitably in this segment on the back of their carefully crafted

appraisal techniques and low-cost operating model.

Exhibit 17:

Competitive landscape in housing finance

Presence

SBI

Metro & Urban

Metro, Urban &

HDFC

Semi urban

LIC Housing Metro & Urban

Sundaram

Home

Repco

Home

Dewan

Housing

GRUH

Finance

Mahindra

Home

Target segment

Salaried & professionals

85% customers are salaried

88% customers are salaried

Sourcing

Largely DSAs

Branches, DSAs, HDFC Bank,

distribution subsidiary

LIC agents, DSAs Branches, DSAs

Branches

Branches & Referral associates

Avg. ticket

size (INRm)

2.3

1.9

1.3

1.2

0.8

0.2

Average

yields (%)

9.90

10.50

12.00

12.60

12.00

12.50

16.00

Asset

quality

0.70%

0.61%

0.31%

1.32%

0.70%

0.28%

Metro, Urban &

Semi urban

Semi urban & Metro 44% customers are salaried, rest

outskirts,

are self employed

Urban & Semi urban Salaried & professionals

Semi urban and

rural

Rural

60% customers are salaried, rest

are self employed

Mostly self-employed

Source: MOSL

2 September 2015

GRUH Finance

Present in niche rural and semi-urban markets

Rural focus yields dual benefit of pricing power and low cost of funds



Strong presence in high-growth states with large demand for housing

Exposure to self-employed segment gives pricing power and funding benefits.

Deeper penetration and geographical expansion to drive 29% CAGR over the next

three years.

GRUH: Strong presence in states with large demand for housing

GRUH founded in 1986, was the first company in India to focus solely on rural

housing finance opportunity. Over the years it has mastered the art of financing

India's non-urban housing landscape and has developed an operating model to

counter unique segment challenges. The company primarily offers small-ticket loans

to home buyers of the low- and middle-income group segments, where yields are

generally higher. With nearly three decades of experience in this segment; its credit

appraisal and recovery systems are well adept to suit the market it operates in.

GRUH has also penetrated deep into states where demand for housing is expected

to remain high. Thanks to its unique business model where it sources over 60% of its

business from GRUH referral associates, the company has penetrated even into

areas where it does not have physical presence.

Exhibit 18:

Steady branch expansion

Existing branches

Additions during the period

224

211

326

Exhibit 19:

Deep penetration in states of operation

357

Total Taluka

240

108

Serviced by Gruh

259

305

209

115

175

120

134

142

154

164

FY10

FY11

FY12

FY13

FY14

FY15

1QFY16

Source: Company, MOSL

Among the top 10 states where housing demand is expected to remain high, GRUH

has strong presence in six (constitute 54% of the total housing demand in the

country). The company has also entered Uttar Pradesh, where housing demand is

expected to be the highest by 2022. Thus, the company is in a sweet spot to

capitalize on the large latent housing demand in India.

2 September 2015

GRUH Finance

Exhibit 20:

GRUH is present in states where demand for housing is high

Urban housing requirment (Mn units)

146

0.3

Uttar

Pradesh

Maharashtra

Bihar

Andhra

Pradesh

West

Bengal

Madhya

Pradesh

Rajasthan

Tamil

Nadu

Gujarat

Karnataka

Rural housing requirment (Mn units)

Penetration in states (%)

Source: Company, MOSL

Focus on the underserved segment imparts pricing power and above-

industry growth rates

GRUH portfolio primarily consists of small-ticket loans (average ticket size INR839k)

in small towns and cities with population of <50,000. GRUH is increasingly focusing

on penetrating small towns and cities as these areas have robust demand of

housing, but are largely underserved by banks and large HFCs in terms for providing

financing. Limited competition has helped GRUH command pricing power along with

above industry growth rates.

Exhibit 21:

Loans extended in rural areas

<50,000 population

>50,000 population

Exhibit 22:

Average ticket size

Avg. Loan (INR 000s)

736

764

607

839

56.0

58.0

53.0

52.0

45.0

542

573

44.0

42.0

47.0

48.0

55.0

FY10

FY11

FY12

FY13

FY14

FY15

FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, MOSL

Exhibit 23:

First mover advantage-GRUHs loan book has grown 27% CAGR over last decade

Loan book (INR b)

70.1

54.4

20.9

24.5

31.8

40.7

89.2

8.2

FY05

10.7

FY06

13.8

17.7

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, MOSL

2 September 2015

GRUH Finance

Exhibit 24:

GRUH enjoys higher yields than other HFCs

LIC

10.6

11.6

HDFC

DHFL

12.4

Repco

GRUH

12.5

12.8

LIC

HDFC

DHFL

Repco

GRUH

Source: Company, MOSL

GRUH has posted a 29.4% CAGR over the past five years (FY10-FY15), albeit on a

smaller size, as against the industry CAGR of 18.1%. Although GRUH is a small player

in the housing financing industry, its market has increased from 53bps in FY09 to

88bps in FY15 on the back of its strategic focus on affordable housing market.

Exhibit 25:

GRUH’s growth has been above industry growth

GRHF's loan growth (%)

29.5

17.3

18.8

12.5

FY10

FY11

FY12

FY13

FY14

FY15

19.1

17.8

17.5

17.2

28.0

Mortgage market growth (%)

33.7

28.9

27.2

0.55

Exhibit 26:

GRUH has steadily gained market share

GRHF's Mortgage market share (%)

0.82

0.74

0.65

0.57

0.88

FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, MOSL

Given the large unmet rural housing demand in India and low penetration of

mortgage, we believe the company is well positioned to continue to gain market

share over the medium term. Further, we expect future growth to come from

company’s strategy to penetrate further into small towns and cities with population

<50,000—especially in states where demand for rural housing is expected to remain

high. We estimate that GRUH would double its market share to 166bps by FY21.

Given the government’s strong thrust on affordable housing, the segment could pick

up meaningfully over the next 10 years; GRUH's dominance in non-metro regions

will augur well to capture such opportunities as and when they come. Secular

growth in non-metro housing market, large scope for increasing geographic

penetration and opportunities in the affordable housing space would enable GRUH

to gain market share for a long time. We build in loan book CAGR of 29% over

FY15-18E.

2 September 2015

GRUH Finance

Exhibit 27:

Strong demand in rural housing is expected to drive market share gains

GRUH's Mortgage market share (%)

1.35

1.50

1.66

0.82

0.88

0.98

1.09

1.21

FY14

FY15

FY16E

FY17E

FY18E

FY19E

FY20E

FY21E

Source: Company, MOSL

Banks and large HFCs favor salaried segment in rural and urban markets

Banks and large HFCs primarily focus on salaried borrowers as can be seen by the

fact that salaried borrowers account for 80-85% of the total outstanding loans. The

reason behind this skew toward the salaried segment is the ease in validating the

income levels and the repayment capabilities. Further, lenders have traditionally

viewed the salaried segment as one with stable cash flows and, hence, consider it as

a low–risk proposition.

Exhibit 28:

Share of non-salaried loans lower among large HFCs

LICHF

HDFC

DEWH

GRUH

REPCO

Source: Company, MOSL

This has led organized lenders to ignore self-employed borrowers, which account for

34% of the workforce, and forced them to rely on personal loans or loans from

unorganized sources at higher interest rates.

Rural and semi-urban housing finance or finance for self-employed remains a highly

under-penetrated opportunity. There are only a few players that have tapped into

these opportunities and have now reached sizes of consequence. GRUH has been a

pioneer in rural housing and has built a portfolio of ~INR90bn over the last 29 years.

2 September 2015

GRUH Finance

Exhibit 29:

Self-employed constitute 34% of the workforce; share in loans is ~10%

Salaried

16%

Casual labour

50%

Self employed

34%

Source: NSSO, MOSL

Focus on profitability over growth

GRUH has battled competitive pressures several times over the past decade,

especially in urban areas—ICICI Bank aggressively doled out home loans at 7% in

2006 and SBI launched its teaser rate products at 8% in 2009. However, GRUH

maintained its product pricing at around 11% despite the competition and slowed

down its lending growth to 18% to maintain home loan pricing at 11%.

Exhibit 30:

GRUH has maintained yields at 12%+

Yields (%)

12.0

13.6

12.1

Cost of Fund (%)

13.4

13.0

13.1

12.8

7.9

10.0

7.9

7.6

9.1

9.3

9.6

9.3

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, MOSL

GRUH's loan pricing acts as a natural filter as only those customers will opt for loans

from the company who are okay with slightly higher interest rates and prefer service

quality in terms of turnaround time and transparency; these factors act as the key

differentiators that enable the company to charge high yields vis-à-vis larger HFCs.

Exhibit 31:

PAT growth has been at +20%

Net Profit (INR m)

690

FY10

915

FY11

1,203

FY12

1,459

FY13

1,770

FY14

2,038

FY15

Profit Growth (%)

423

FY08

503

FY09

Source: Company, MOSL

2 September 2015

GRUH Finance

Product portfolio designed for specific needs and segments

GRUH has designed four basic products to tap the rural housing finance opportunity:

(a) Suraksha is the basic mortgage product for salaried individuals; (b) Suvidha is

similar to Suraksha except for the fact that it caters to self-employed individuals

with no direct income proof and income estimation is through surrogate methods;

(3) Sajavat is a home improvement loan product. (4) Samruddhi is a loan given

primarily to self-employed for purchase of office or business premises

Exhibit 32:

GRUH’s product offerings

Gruh Suraksha

Gruh Suvidha

Loan to salaried

Loans to professionals

individuals and

and self-employed

professionals based on based on appraisal

formal income proof income, calculated

based on surrogate

income proof

up to 85

up to 25

9.95-12.7

54*

up to 85

up to 15

10.15-13.4

31*

Gruh Sajavat Gruh Samruddhi

LAP

Loans offered to Loans offered to Loan offered for

individuals to professionals for various business

fund repair and purchase of offices

needs,

renovation of for their business collateralized by

their existing

property.

home

up to 85

up to 15

11.0-13.75

<1.0*

up to 85

Developer Loan

Purpose

LTV (%)

Tenure (Years)

Interest (%)

Loan book share (%)

Variable

12.5-15.25

12.25-17.0

13-17

* Based on FY13 data Source: Company, MOSL

Exhibit 33:

Home loans constitute 92% of loan book

Home Loans

3.0

5.0

6.0

NRP Loans

4.0

5.0

4.0

Developer Loans

3.0

3.6

5.0

4.2

Exhibit 34:

Loan mix (%)

Developer

NRP Loans Loans

91.0

92.0

91.0

92.0

92.2

FY10

FY11

FY12

FY13

FY14

FY15

Home

Loans

92%

Source: Company, MOSL

Unique sourcing model: over 60% of business via GRUH referral associates

Unlike the DSA model that is widely followed by banks (which results in disconnect

between the sanctioning officer and customer), GRUH works on referral associate

program, where the only task of a referral associate is to pass on the leads to a

GRUH employee. Credit appraisal, monitoring and recovery are the responsibility of

the employee. A referral associate can be anyone—GRUH's own public deposit

seeking agents, agents of other NBFCs, freelancers, etc.

2 September 2015

GRUH Finance

Exhibit 35:

Majority of new business is sourced from DSA

Business from DSA (%)

63.3

57.0

54.0

58.6

0.3

61.5

61.0

0.4

Exhibit 36:

Commission paid for each loan sourced

Fees per loan (%)

0.4

FY10

FY11

FY12

FY13

FY14

FY15

FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, MOSL

The referral associates are given incentives based on their loyalty and the quantum

of business they refer. Currently, referral associates account for over 60% of the

total value of GRUH's home loans. The model has helped the company in expanding

reach without opening a branch at the taluka level, thus minimizing operating costs.

The success of the model is evident from the fact that despite having only 40

branches in Gujarat, the company is present in almost all the 224 talukas.

In order to generate more sales, GRUH also conducts outreach programs from each

of the retail offices to potential taluka places. The outreach marketing program also

serves as a center for collecting installments besides providing enquiry handling, file

opening and disbursement services.

Exhibit 37:

Sourcing channels for GRUH

Customers sourcing

Walk-ins

GRUH Referral

Associates (GRA)

Outreach Programs

Source: Company, MOSL

However employee and branch is the centre of credit appraisal

The branch is at the centre of GRUH Finance’s credit model; once the lead is

generated the branch takes the sole responsibility of credit appraisal. GRUH has

developed internal credit scoring model which takes in to account the borrower's

credit score based on 23 different inputs. The exhaustive model captures the

borrower’s cash flows, income generating capability, spending patterns and historic

credit behavior, if any for each of its customer classes - salaried, professionals and

self-employed. The pricing is designed to price the risk within each customer class. If

the credit score is favorable, the subsequent activities of field investigation,

personal discussion, technical visit and reference/ legal verification start.

Well-calibrated geographic expansion

GRUH follows a well-calibrated branch expansion strategy whereby a new branch is

opened at a district or taluka nearest to the existing branch. The strategy has

worked in its favor and has multiple benefits: a) Strong understanding of local area

2 September 2015

GRUH Finance

dynamics, b) ease of operations in terms of transportation and c) gaining a large

market share in the local area before expanding to another area.

Although this strategy results in relatively slower branch growth, it allows the

branch to obtain strong understanding of local area dynamics and build robust

operating processes.

Exhibit 38:

State-wise penetration for GRUH

Total Taluka

357

224

175

211

326

240

Serviced by Gruh

259

305

209

108

164

State-wise penetration for GRUH

Source: MOSL

The company continues to follow a similar model in South India, where it entered in

the second-half of the last decade. The progress in terms of loan book accretion is

currently slow but is expected to pick up once it consolidates its position in those

areas. This strategy has resulted in best-in-class asset quality despite operating in a

segment perceived risky by most other players. We note that GRUH has negligible

net NPAs for the last seven years.

Creating banking awareness to minimize collections costs

Monthly collection is the biggest challenge faced by rural financers due as the rural

populace lack banking habits and prefers to make cash payments. Collecting

monthly payments from over 150,000 customers scattered across 992 talukas is a

daunting task. GRUH has consciously pushed its customers to route repayments

through banking channels and it does not collect cash at its branches or at

customers’ doorstep.

Majority of collections are managed by taking postdated cheques; the company has

also established a network of collection centers by entering into tie-ups with banks

having wide rural network and instructs borrowers to deposit cash into collection

accounts at the nearest branches of those commercial banks. Cash collections

constitute less than 5% of the total collections and only a few branches are allowed

to collect cash. This helps it save money on cash collection/management and helps

company operate with only 580 employees without outsourcing any credit activity.

2 September 2015

GRUH Finance

Best-in-class liability profile aids spread

Consistent track record and strong HDFC parentage fetches AA+ ratings



Consistent track record, strong parentage helps GRUH fetch AA+ ratings

Disbursements in underserved areas helps GRUH avail low cost NHB funds

Well diversified liability profile

Given its long track record of consistent operating performance, profitability profile

and strong parentage, GRUH Finance has a well-diversified liability profile. Public

deposits, commercial banks, refinance from NHB and NCDs are the main sources of

funds. Moreover given that more than 45% of disbursements continue to happen in

areas where population is below 50,000, GRUH has been a disproportionate

beneficiary of low cost NHB refinancing.

Exhibit 39:

Bank and NHB loans constitute nearly two-thirds of the borrowings

NHB

Bank loans

NCD

FY13

Public Deposits

FY14

FY15

Source: Company, MOSL

FY11

FY12

Big beneficiary of low cost NHB funding

As part of its focus on rural housing, the government via NHB offers various schemes

under which NHB refinances banks and HFCs. Most of the schemes are designed to

encourage lending in semi-urban, rural and periphery of urban areas, where ticket

sizes are generally low. Given the design of schemes, GRUH and Can Fin Homes have

been the disproportionate beneficiaries of low-cost funds released by NHB. Also,

they aid in reducing the asset liability management (ALM) mismatches on their

balance sheets and eventually help in reducing the cost of borrowings.

GRUH operates in a niche segment, catering to the lower-income group in rural and

semi-urban areas; over 45% of its disbursements have been in towns and cities with

population less than 50,000. The company is increasing its penetration in these

towns and cities and, incrementally, nearly 60% of the disbursements are in area

with sub-50,000 population. As a result, a sizeable portion of its portfolio qualifies as

rural housing finance and is eligible for low-cost funding from NHB. As of 1QFY16,

NHB accounts for 32% of the total borrowings.

2 September 2015

GRUH Finance

Exhibit 40:

NHB borrowings form a major part of small HFCs’ funding profile

12.7

HDFC

DHFL

3.5

21.4

LICHF

GIC HF

Sundaram

Housing

Repco

GRUH

Source: Company, MOSL

Illustrative of uniqueness of model; GRUH has availed over 13% of the total NHB

disbursement to HFCs in FY14. The company has also received over 20% of the NHB

disbursements to HFCs under the Golden Jubilee Rural Housing Finance Scheme.

Exhibit 41:

GRUH: Large beneficiary of NHB re-financing

NHB's Disb to HFC's (INR b)

Refinancing availed by Gruh (INR b)

22.7

16.5

13.6

6.7

35.4

FY10

2.4

33.1

FY11

5.5

53.0

12.0

76.9

10.5

96.3

13.0

13.5

Gruh' share (%)

FY12

FY13

FY14

Source: Company, NHB, MOSL

Exhibit 42:

Refinancing schemes of NHB

Liberalized

Golden Jubilee Rural

Energy Efficient

Refinancing

Housing

Housing scheme

Schemes

Housing to weaker

Refinancing for

To refinance

Promote use of

sections; the

rural housing

construction,

solar equipment

government announced

purchase,

in homes

the quantum in budget

repairs, upgrade of

funds allocated from RIDF

dwelling units

Rural Housing Fund

Below INR 1.5mn

Rural

3-7 years

Less than Rs1.5mn

Rural

1-15years

Urban Low

Affordable

Income Housing Housing

Low-income

housing in

urban areas

Objective

Loan Size

Location

Tenure

Interest Rates

To provide

refinancing

assistance for

affordable

housing

projects

Concessional rates Up to INR 50,000 Below INR1.0mn Below INR3m

—below INR 0.5m

Any

Urban

1-15years

Fixed

5-15 years

Fixed with

spreads cap of

275bp

5 years

Fixed/floating

1-15years

Fixed/floating

Fixed with spreads cap of Fixed/floating

200bp

6.5% for loans <0.2m

7% for loans from INR 0.2-

0.5m

7.5% for loan of INR0.5-1m

Weaker section

Any

Ultimate Borrower

Any

Annual income Any

less than

INR0.2m

Source: NHB

2 September 2015

GRUH Finance

At 9.3%, GRUH’s cost of funds is comparable to large HFCs

NHB and bank loans account for nearly two-thirds of GRUH’s funding needs. As bank

funds are generally linked to the base rate, the ongoing systemic reduction in base

rates would favorably impact the company’s cost of funds. Moreover GRUH has

effectively tapped different sources of borrowing to keep its cost of funds under

check. As a result, the average cost of funds has broadly remained steady over the

past few years—from 9.13% in FY12 to 9.25% in FY15. The cost is expected to

moderate in the coming quarters, in line with the expected decline in the wholesale

rates.

Exhibit 43:

GRUH’s cost of funds has remained largely stable

Cost of Fund (%)

10.0

7.9

7.6

9.1

9.3

9.6

9.3

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, MOSL

GRUH’s cost of borrowing is comparable to that of large HFCs, primarily due to 1)

higher proportion of NHB refinancing in total loan book, 2) higher public deposits

franchise compared with other players and 3) strong parental support that aids in

credit rating.

Exhibit 44:

AA+ rating, consistent track record and NHB refinancing lower the cost of funds

HDFC

GRUH

LICHF

REPCO

9.6

9.2

9.3

IBFSL

DEWH

9.7

10.0

HDFC

GRUH

LICHF

REPCO

IBFSL

DEWH

Source: MOSL

Strong debt market franchise

On back of strong wholesale debt market franchises, GRUH has also de-emphasized

its bank funding and has even done an admirable job of collecting deposits and

renewing old ones.

2 September 2015

GRUH Finance

Exhibit 45:

GRUH has been increasing share of low cost debt market instruments

CPs & NCDs (INR b)

% of Total Borrowing

17.5

10.1

7.3

7.5

4.7

1.7

FY09

1.8

FY10

3.0

FY11

1.8

FY12

11.7

8.9

5.8

FY13

5.7

FY14

14.4

FY15

Source: Company, MOSL

Exhibit 46:

Dependence on high cost bank borrowing has reduced substantially

Bank loan (INR b)

50.6

33.7

38.7

41.5

34.0

27.8

29.7

32.9

% of Total Borrowing

9.0

FY08

7.6

FY09

9.0

FY10

12.3

FY11

13.0

FY12

13.6

FY13

19.2

FY14

27.0

FY15

Source: Company, MOSL

Higher public deposits franchise compared with other players

GRUH has developed a strong deposit franchise, with 16% of its funding coming

from this channel. The company has leveraged its strong parentage and better credit

ratings to garner public deposits. Compared with other HFCs, GRUH enjoys higher

proportion of granular public deposits in its borrowing mix.

Exhibit 47:

Higher share of public deposits compared with other HFCs

IHFL

Repco

LICHF

DEWH

GRUH

HDFC

32.0

15.6

8.0

IHFL

Repco

2.5

LICHF

DEWH

GRUH

HDFC

Source: Company, MOSL

Strong parentage of HDFC a big advantage

Besides having solid operating metrics, GRUH also benefits from being a subsidiary

of housing sector leader HDFC (which owns 58.6% of its equity; high parental

shareholding translates into strong management and strategic inputs from HDFC).

Strong parental support from HDFC aids in GRUH’s credit rating and enables it to

2 September 2015

GRUH Finance

access fund from banks and debt market (via issuance of commercial paper and

debentures) at competitive rates.

Exhibit 48:

GRUH’s credit rating

Product

Public Deposits

NCD

Sub. NCD

Commercial Paper

Rating by CRISIL

FAAA

AA+ (Stable)

AA+

A1+

Rating by ICRA

MAAA

AA+ (Positive)

AA+

A1+

Source: Company, MOSL

HDFC’s top management has a significant presence in GRUH’s board—HDFC’s vice-

chairman and CEO is the non-executive chairman of and its managing director is also

on the company’s board. Further, GRUH’s current managing director is a former

HDFC employee.

Securitization yet to be explored; can be a further value add

A large chunk of GRUH’s assets qualify as priority sector assets, the securitized paper

appetite from banks is likely to be high. The company has not been exploring this

route, but with increasing size we feel that the 100bps cost advantage through the

same can be a boost to profitability.

2 September 2015

GRUH Finance

Well managed asset quality with healthy PCR

GNPAs below 1% over the last five years

GRUH maintained asset quality despite lending to the low-income group

GRUH operates in a niche segment, catering to the lower-income group in rural and

semi-urban areas, which is perceived as a riskier segment. Nearly 50% of the

company’s cumulative disbursement has been toward loans of <INR0.3m; whereas

in terms of family income, 52% of the disbursements is to individuals with family

income of less than INR15,000/month.

Exhibit 49:

50% of disbursements toward loans <INR0.3m

>INR1m

>INR0.5m

to INR1m

21%

Upto

INR0.3m

50%

>15k to 25k

24%

Exhibit 50:

52% loans to individuals with income up to INR15k

>50k

>25k to 50k

18%

Upto 15k

52%

>INR0.3m

to INR0.5m

21%

Source: Company, MOSL

Despite operating in this segment, GRUH’s asset quality has been stable with GNPA

at 0.28% (FY15). The GNPAs are completely provided for, resulting in provision

coverage of 100% and nil NNPA. Given the stringent credit appraisal methodology,

conservative lending approach with lower LTVs, focus on recovery and adequate

provisioning, we believe that asset quality would remain under check over the

medium term.

Exhibit 51:

Asset quality expected to remain under check

0.82

0.52

GNPA (%)

NNPA (%)

100

0.05

0.32

FY11

FY12

FY13

0.27

FY14

0.28

0.26

FY15

0.24

0.22

FY11

FY12

FY13

FY14

FY15

FY16E FY17E FY18E

100

Exhibit 52:

Provision coverage to remain at 100%

PCR (%)

100

FY16E FY17E FY18E

Source: Company, MOSL

GRUH also offers loans to developers for residential and commercial projects. These

developer loans constitute a small percentage of the total loan book (3.6% in FY15),

and asset quality has been impeccable in this segment with GNPA at zero.

2 September 2015

GRUH Finance

…but PSBs that lent to low income group witnessed sharp rise in NPAs

As per NHB data, Public Sector Banks (PSBs) that offered low-ticket loans (loans of

<INR1m) witnessed a sharp increase in delinquency levels—especially for loans

below INR0.2m. In fact, the delinquency levels increased with the decrease in the

ticket size—higher NPAs in loans below INR0.2m and relatively lower NPA in case of

loan above INR1m. As a result, PSBs increased focus on loans above INR2.5m and

reduced disbursements in loans below INR1m to maintain asset quality.

Exhibit 53:

NPA (%) in different loan segments for PSBs

11.5

FY12

10.6

FY13

FY14

Exhibit 54:

Home loan disbursements (INR b) by PSBs

FY12

FY13

FY14

11.5

4.8

4.5

3.4

1.8

3.0

INR0.5m to

INR1m

1.7

1.4

1.0

1.1

1.0 0.6

<INR0.2m

INR0.2 to

INR0.5m

INR0.5m to

INR1m

INR1m to

INR2.5m

> INR2.5m

<INR0.2m

INR0.2 to

INR0.5m

INR1m to

INR2.5m

> INR2.5m

Source: MOSL, NHB

System-based credit decisions with lower LTVs aid asset quality

Loan approval process is decentralized at GRUH to increase efficiency and improve

the turnaround time. However, loans beyond a certain limit are referred to the

management committee for approval.

GRUH has also adopted a system-based credit sanction structure where the credit

evaluation is done using a customized credit score model and human intervention is

minimal. The model evaluates each individual applicant on various credit

parameters, including income, assets, liabilities, savings, and asset creation

tendencies. GRUH has set an interest rate band for each product within the model

and a customer is offered an interest rate based on individual credit score.

Exhibit 55:

65% of cumulative disbursements at <75% LTV

81% to 85%

15%

>85%

Exhibit 56:

70% of incremental disbursements at <75% LTV

81% to 85%

>85%

Upto 75%

70%

76% to 80%

17%

Upto 75%

65%

76% to 80%

27%

Source: Company, MOSL

Historically, 65% of the loans disbursed were at an LTV of <75%. However, in a sign

of increasing conservatism, 70% loans disbursed in FY15 were at an LTV of less than

75%. Further, to maintain asset quality, the company follows conservative lending

practices where it offers loans at lower LTVs (with average LTVs maintained below

60%).

2 September 2015

GRUH Finance

Exhibit 57:

Average LTV maintained at ~60%

LTV (%)

FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, MOSL

Exhibit 58:

Loan approval process

Referral

Associates

Branch

Initial Screening:

23 parameter credit scoring model

Reject

Proposal

Favorable

credit score?

Yes

Reference check and

personal discussion

Field

Investigation

Legal

Verification

Technical Visit and

verification of documents

Reject

Proposal

Disbursal

criteria met?

Yes

Disbursal

Source: Company, MOSL

Employees’ incentives tied to asset quality

Credit evaluation, appraisal, documentation, servicing and recovery of loans are

carried out by GRUH’s experienced in-house employees. In order to reduce NPAs,

incentive structure of branch employees is closely linked to the asset quality of the

loans they approve and service. This ensures that the set norms of credit evaluation

and appraisal are not diluted and similar standards are maintained across all

branches.

2 September 2015

GRUH Finance

Earnings to grow 26% CAGR over FY15-18E

Low operating costs, steady margins and credit cost to drive earnings

GRUH’s PAT is likely to grow at 26% CAGR over FY15-18E, on back of healthy loan

growth (29%), low operating costs, stable margins and credit costs (<20bp over the

next three years). We expect GRUH to report ROA/ROE of 2.4%/34% respectively by

FY18E.

Lean operating cost structure

GRUH has maintained a low operating cost structure despite operating in the rural

areas. The company has kept its operational costs at the minimal by using referral

associates to source the business and efficient employee utilization. This has

resulted in its cost-income ratio, which is in-line with large HFCs at 16.7% for FY15

(15.8% in 1QFY16).

Exhibit 59:

CI ratio <20%; cost to asset <1%

1.0

Cost to income (%)

0.9

0.8

Cost to asset (%)

0.7

0.6

19.2

FY12

18.8

FY13

18.4

FY14

16.7

FY15

15.9

FY16E

14.9

FY17E

14.1

FY18E

Source: Company, MOSL

Exhibit 60:

Cost to income comparable to large HFCs

HDFC

IBHF

LICHF

GRUH

Repco

DHFL

13.8

7.4

15.2

16.7

HDFC

IBHF

LICHF

GRUH

Repco

DHFL

Source: Company, MOSL

Spreads/margin to remain at 3%+/4%+ respectively

GRUH’s strong presence in underserved areas where competition is low imparts

pricing power resulting in higher yields. Further, GRUH is able to borrow from

markets at competitive rates due to its strong parentage and higher credit rating

(AA+); it also avails cheaper financing from NHB through its various schemes, thus

keeping its cost of funds low. This dual benefit has resulted in GRUH maintaining

spreads and margins of 3%+and 4%+ respectively.

2 September 2015

GRUH Finance

Exhibit 61:

Spreads and margins sustained over 3% and 4% respectively

Spreads (%)

4.2

4.5

4.3

3.8

3.5

Margin (%)

3.6

3.5

3.4

3.3

4.2

4.9

4.8

4.5

4.3

4.1

4.0

3.9

FY10

FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company, MOSL

Earnings to grow 26% CAGR, RoEs to expand to 34% by FY18E

On back of strong pricing power, high credit ratings and access to cheap NHB

refinancing, GRUH has been able to maintain 4%+ NIM. Lean operating costs and

low credit costs (currently at lowest levels, expected to remain the same) have

helped generate RoA of 2.4%. Given the niche business model and immense

potential of scalability due to massive opportunity, GRUH will witness healthy

earning and growth trajectory. We expect RoE to expand to 34% by FY18E.

Exhibit 62:

RoA to remain at ~2.4%; RoE to grow to 34%

RoE (%)

RoA (%)

Exhibit 63:

PAT to grow 26% CAGR

Net Profit (INR m)

Profit Growth (%)

2.2

2.7

3.0

3.1

2.9

2.8

2.5

2.4

24.5 28.4 31.4 34.2 33.3 32.2 30.9 31.9 32.8 33.8

690

915

1,203 1,459 1,770 2,038 2,532 3,211 4,114

FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Source: Company, MOSL

2 September 2015

GRUH Finance

Well capitalized for sustained growth

Lower ticket size leads to lower risk weights

GRUH is adequately capitalized to post a 29% loan book CAGR

GRUH’s capitalization levels are adequate (total CAR at 15.6% in 1QFY16) and most

of the capital is in the form of Tier 1 capital (Tier 1 CAR: 14.1%). The company last

raised equity via rights issue in 2006 and has since then maintained its capital levels

via issuance of subordinated debt in small sizes and internal accruals. Tier II capital

currently stands at 1.4% and can go up to 6.0%, providing ample room to raise

subordinated debt without diluting shareholder stake.

As most of the loan book consists of loans less than INR2m, risk weight on these

loans are lower at 50% as against 75-100% risk weight for large-ticket loans. This

results in less capital consumption, supporting higher growth over the medium

term.

Exhibit 64:

Majority of GRUH’s loans have lowest risk weight of 50%

Loan Amount

Up to INR2m

INR 2-7.5m

Above INR7.5m

<75%

50%

75%

LTV

<80%

50%

100%

>80%

50%

100%

Source: MOSL, Company

Exhibit 65:

Healthy capital adequacy ratio

Total CAR (%)

16.6

15.6

13.3

13.0

14.0

13.3

14.6

12.9

Tier 1 (%)

16.4

14.7

15.4

13.9

Exhibit 66:

Lower RWA; leads to less capital consumption

RWA (INR m)

66.5

69.4

64.2

RWA/Total loans (%)

67.3

54.1

56.6

16,320

FY10

FY11

FY12

FY13

FY14

FY15

FY10

22,045

FY11

26,109

FY12

36,570

37,900

50,450

FY13

FY14

FY15

Source: Company, MOSL

2 September 2015

GRUH Finance

Consistent and sustainable performance

Consistency + Sustainability + Stability + Scalability = Premium valuation



Long track record of consistent operating/financial performance coupled with 30%

RoEs have led to multiple re-rating from 3x to 8x

Strong parentage, best in class returns ratios and immense potential of scalability will

continue to drive premium valuations

Superior and sustainable return ratios

GRUH commands significant premium over peers due to a) long track record of

consistent financial/operating performance, b) immense potential of scalability due

to massive opportunity in the segment, c) strong parentage of HDFC ltd., d) best-in-

class return ratios (with 10-year average RoE/RoA of +28%/2.5% over the last

decade), e) efficient use of capital (has not diluted in the last 10 years), and f)

flawless execution—NPLs have never gone above 2%, not even during the worst of

times.

Earnings CAGR at 28% over the past three years coupled with +30% RoEs has

resulted in steady re-rating of the stock over the last three years, with its one-year

forward book multiple expanding from 3x in FY11 to 8x in FY15. The fact that it has

never raised capital since FY05 despite growing at CAGR of 27% over FY05-15

highlights the strength of the business model. Current valuations suggest strong

market share gains and a long period of supernormal growth for the company. The

current stock price discounts FY17E book value by 9x, making it the most expensive

financial stock in the country. However, given the size of the opportunity, the

market is factoring in continuous market share gains and consistent performance

over the long term (as has been displayed in other HDFC group companies).

Exhibit 67:

GRUH trades at a significant premium to other HFCs

REPCO

10.0

DEWH

15.0

20.0

RoE (%)

Source: Company, MOSL

25.0

30.0

35.0

LICHF

GRHF

HDFC

IHFL

While it can easily be argued that GRUH is at the peak of its profitability, we believe

that it could sustain for many years. The opportunity size for GRUH over the next 10

years is absolutely large, given the low levels of penetration outside West India and

new possibilities emerging out of the thrust on affordable housing. Given its small

size at INR93bn as of June 2015, we believe that the company can achieve 25% loan

book CAGR over the next decade.

2 September 2015

GRUH Finance

We value GRHF based on residual income model assuming earnings CAGR of 18% by

FY35E, Rf=7.75%, β=0.71, risk premium of 5% and terminal growth rate of 5%. We

expect GRHF’s net profit to grow at CAGR of 26% over FY15-18E and RoEs to touch

~34% by FY18E.

Our assumptions for residual income model are highlighted in the exhibit 71 below.

We have arrived at our FY18E target P/BV of 7.9x using the formula P/B = (ROE-

g)/(Ke-g) where we assumed long term RoE of 18%, Ke of 12% and sustainable

growth rate of 11% over the long term.

In our view GRHF would continue to trade at premium valuation- led by its niche

business model, high capitalization, consistent execution, inherently high

profitability with the ability to sustain return ratios, and minimal asset quality

overhang (given a secured loan book). We assign

Buy

rating to the stock with target

price of INR295.

Exhibit 68:

Superior ROA and loan growth

46%

DEWH

37%

28%

19%

10%

1.0

1.5

2.0

2.5

RoA (%)

Source: Company, MOSL

3.0

3.5

4.0

4.5

GRHF

REPCO

IHFL

HDFC

Exhibit 69:

One-year forward P/E

P/E (x)

1 Yrs Avg(x)

2 Yrs Avg(x)

3Yrs Avg(x)

Exhibit 70:

One-year forward P/B

14.0

10.0

33.7

19.9

6.0

2.0

P/B (x)

1 Yrs Avg(x)

2 Yrs Avg(x)

3 Yrs Avg(x)

36.7

29.2

10.4

8.3

5.7

9.6

Source: Company, MOSL

2 September 2015

GRUH Finance

Exhibit 71:

Residual Income (INR Million)

FY15 FY16E FY17E

Net Profit

% growth

EPS (A)

Dividend Payout (%)

BVPS

% growth

CoE*BVPS (B)

RoE (Avg. Equity) (%)

Residual Income (A-B)

% growth

Terminal Value (TV)

Discount Factor

PV of Residual Income

PV of Terminal Value

BV per share

PV of Residual income

Terminal Value

TP (INR)

Upside (%)

0.94

4.4

0.84

5.1

0.75

5.9

0.67

6.6

0.48

9.2

0.43

9.6

0.31

11.4

0.28

11.3

0.20

11.2

0.18

10.4

2,038

5.6

35.7

19.6

2,532

24.3

7.0

30.0

24.1

23.1

2.3

31.9

4.7

3,211

26.8

8.8

30.0

29.8

23.8

2.8

32.8

6.0

28.6

FY18E

4,118

28.3

11.3

30.0

37.2

24.7

3.5

33.8

7.9

30.3

FY19E

5,148

25.0

14.2

30.0

47.1

26.7

4.3

33.6

9.8

25.2

FY22E

10,055

25.0

27.7

30.0

94.4

25.8

8.7

32.7

18.9

24.5

FY23E

12,066

20.0

33.2

30.0

117.6

24.6

11.0

31.3

22.2

17.3

FY26E

20,849

20.0

57.4

30.0

219.1

22.4

20.8

28.8

36.5

18.4

FY27E

23,977

15.0

66.0

30.0

265.3

21.1

25.5

27.2

40.5

10.8

FY30E

36,466

15.0

100.3

30.0

449.7

18.5

44.2

24.2

56.1

11.9

FY31E

40,112

10.0

110.4

30.0

527.0

17.2

52.4

22.6

58.0

3.3

FY35E

58,728

10.0

161.6

30.0

921.5

14.0

94.2

18.7

67.4

4.2

937.4

0.12

7.8

96.9

19.6

178.8

96.9

295.3

27.3

Source: Company, MOSL

2 September 2015

GRUH Finance

Company background

GRUH Finance (GRHF) was established in 1986 as Gujarat Rural Housing Finance Ltd

and was promoted by HDFC and Aga Khan Fund for Economic Development (AKFED).

The company commenced operations in 1988 from Ahmedabad and later became a

subsidiary of HDFC in June 2000.

GRUH primarily provides home loans to individuals and families for purchase,

construction, extension, repair and renovation. The company also offers loans to the

self-employed segment and professionals for the purchase of office premises and

developers. GRHF operates in a niche segment, catering to the lower-income group

in rural and semi-urban areas. The company has diversified geographically and

operates in eight Indian states through 162 branches.

The company relies on third-party channels, GRUH Referral Associates (GRAs), for

sourcing majority of its business. GRAs only source loans while GRUH retains control

over the credit, legal and technical appraisals. Business sourced through GRAs was

61% of the total disbursements made during FY15. GRUH also conducts outreach

programs from its retail offices to potential taluka places. The outreach marketing

program also serves as a centre for collecting installments besides providing enquiry

handling, file opening and disbursement services.

Management details

GRUH's senior management comprises professionals who have significant

experience in the housing finance industry. The average tenor of the company’s

senior management is over 15 years. The team is led by Mr. Sudhin Choksey, who is

the managing director since 2000. Other key personnel are Mr. Kamlesh Shah

(executive director) and Jayesh Jain (CFO).

2 September 2015

GRUH Finance

Exhibit 72:

Management Details

Name

Mr. Keki Mistry

Designation

Non-executive

Chairman

Age Education

57 Chartered

Accountant

Mr. Keki M. Mistry is the Vice Chairman & CEO of HDFC. He is a Fellow of the

Institute of Chartered Accountants of India. Mr. Mistry serves as a director on

the board of several companies, including HDFC Bank Limited, HDFC Standard

Life Insurance Co. Ltd., HDFC Asset Management Company and Sun Pharma. He

has been on the board of GRUH since 2000 and has been the chairman of the

company since 2002.

Chartered

Mr. Sudhin Choksey, the managing director of GRUH, is a Fellow Member of the

Accountant

Institute of Chartered Accountants of India. He was appointed as the CEO of the

company in 1998 and the managing director in 2000. He has been on the board

of GRUH since May 1996. He has experience of handling functional areas of

finance, commercial and general management both in India and abroad.

Chartered

Mr. Kamlesh Shah, the executive director of GRUH, is a Chartered Accountant

from the Institute of Chartered Accountants of India. He has been employed

Accountant

with GRUH since 1990. He has experience of handling functional areas of

operations, finance, human resources and administration. He is on the board of

GRUH since 2010.

Masters in

Ms. Renu Sud Karnad, the managing director of HDFC, holds a Master’s degree

Economics

in Economics from the University of Delhi and is a law graduate. She is a Parvin

Fellow—Woodrow Wilson School of International Affairs, Princeton University,

U.S.A. She has been employed with HDFC since 1978. She is responsible for the

lending operations of HDFC. She is the chairperson of HDFC Property Ventures

Ltd. She has been on the board of GRUH since 2000.

Degree in

Mr. S.M. Palia is a development banker. He holds a degree in Commerce, Law

Commerce, Law and Banking [CAIIB, CAIB London)] and has 25 years of experience with IBDI in

and Banking

various capacities. He retired as executive director of IDBI in 1989 and has been

on the board of GRUH since 1993. He was the vice chairman of the company

from 1993 to 2000 and appointed chairman of the company in January 2001 for

one year.

Graduate in Law Mr. Rohit C. Mehta is a prominent and successful industrialist possessing a wide

and varied experience in the management of business and industry. He is a law

graduate from the Bombay University. He has also been the president of FICCI.

He is the Chairman of Torrent Cables Ltd. and has been on the board of GRUH

since 1987. He was the chairman of the company from 1987 to 1998.

Mr. Sudhin Choksey CEO, Managing

Director

Mr. Kamlesh Shah

Executive

Director

Ms. Renu Karnad

Non-executive

Director

Mr. SM Palia

Independent

Non-executive

Director

Mr. Rohit Mehta

Independent

Non-executive

Director

Mr. Prafull Anubhai Independent

Non-executive

Director

Mr. KG

Krishnamurthy

Independent

Non-executive

Director

76 B.Sc (Economics) Mr. Prafull Anubhai is a corporate advisor. He is the chairman of the Board of

Management of the Ahmedabad University. He has done his B.Sc. (Econ.) from

the London School of Economics and attended PMD at Harvard Business School.

He has 30 years of experience as the chief executive of textile manufacturing

operations. He has been on the board of GRUH since 1987.

B.Tech, MBA

Mr. K.G. Krishnamurthy is the managing director & CEO of HDFC

Mr. SG Mankad

Independent

Non-executive

Director

Independent

Non-executive

Director

IAS

Property Ventures Limited (HPVL). Prior to that, he was employed with

HDFC as Senior general manager—Technical Services. He is a graduate

from IIT Kharagpur with a management degree from Jamnalal Bajaj

Institute of Management, Mumbai. He has over two decades of

experience in real estate. He has been on the board of GRUH since

2004.

Mr. S.G. Mankad, IAS (retd), holds a Masters in History from University

of Delhi. He has served in various capacities both in the government of

India and the state of Gujarat. His last assignment was as chief

secretary, Govt. of Gujarat. He is on the board of GRUH since 2010.

Mr. Biswamohan

Mahapatra

MSM, MBA, MA Mr. Biswamohan Mahapatra was a career central banker, over 33 years

in RBI. In RBI, he worked in various capacities and retired as executive

director in 2014. He holds a Master of Science in Management (MSM)

degree from Arthur D. Little Management Institute, Cambridge, USA,

MBA from University of Delhi, Master of Arts from JNU, Delhi.

Source: Company, MOSL

2 September 2015

GRUH Finance

Key risks

Regulatory risk

Regulatory changes such as increase in risk weights and cap on the interest spread

under refinancing schemes can also impact the company. A change in the terms and

eligibility conditions of refinancing schemes can also adversely impact margins.

Adverse regulatory changes will have a negative impact on growth and profitability

of the company.

Concentrated borrowing profile

NHB’s refinancing and bank borrowings constitute almost all of GRUHs’ total

borrowings. The remaining borrowing needs are fulfilled by other sources such as

public deposits. Strong future growth would require higher borrowings and

proportion of NHB refinancing may decline, thus forcing GRUH to tap other sources

of borrowings such as NCDs and public deposits.

Rich valuations leave little room for earnings deviation from the current

trajectory

GRUH derives such rich multiples due to ~30% earnings CAGR expectations over the

medium term (approx. 10 years). In case any of the above-mentioned risks

materialize, earnings may disappoint and we could see meaningful value erosion.

2 September 2015

GRUH Finance

Financials and valuations

Income Statement

Y/E March

Interest Income

Interest Expended

Net Interest Income

Change (%)

Fee Income

Other operating income

Other Income

Net Income

Change (%)

Operating Expenses

Operating Income

Change (%)

Provisions/write offs

PBT

Tax

Tax Rate (%)

PAT

Change (%)

Proposed Dividend

2011

3,410

2,009

1,401

46.5

143

1,604

24.4

320

1,283

24.0

1,256

341

27.1

915

32.7

450

2012

4,856

3,101

1,755

25.3

172

2,041

27.3

392

1,650

28.6

1,628

424

26.1

1,203

31.5

472

2013

6,181

4,044

2,137

21.8

223

2,460

20.5

463

1,997

21.1

1,968

509

25.9

1,459

21.2

522

2014

8,130

5,436

2,694

26.1

271

3,025

23.0

556

2,469

23.6

2,445

675

27.6

1,770

21.3

632

2015

10,211

6,777

3,433

27.4

331

3,826

26.5

640

3,186

29.0

177

3,008

970

32.3

2,038

15.2

875

2016E

12,860

8,646

4,213

22.7

440

4,720

23.4

767

3,953

24.1

213

3,740

1,208

32.3

2,532

24.3

889

2017E

16,481

11,203

5,277

25.3

575

5,924

25.5

926

4,998

26.4

255

4,743

1,532

32.3

3,211

26.8

1,127

(INR Million)

2018E

21,251

14,530

6,720

27.3

704

7,502

26.6

1,118

6,384

27.7

300

6,083

1,965

32.3

4,118

28.3

1,446

Balance sheet

Y/E March

Capital

Reserves & Surplus

Net Worth

Secured Loans

Change (%)

Total Liabilities

Cash and bank balance

Investments

Change (%)

Loans

Change (%)

Net Fixed Assets

Other Assets

Total Assets

2011

352

2,828

3,179

29,622

27.5

32,801

1,237

347

5.9

31,768

29.5

122

-673

32,801

2012

353

3,503

3,856

38,293

29.3

42,148

1,695

244

-29.5

40,668

28.0

116

-575

42,148

2013

357

4,553

4,910

49,115

28.3

54,025

221

651

166.6

54,378

33.7

118

-1,344

54,025

2014

360

5,712

6,072

64,439

31.2

70,512

832

530

-18.7

70,090

28.9

110

-1,050

70,512

2015

727

6,388

7,115

82,072

27.4

89,187

741

798

50.7

89,154

27.2

137

-1,643

89,187

2016E

727

8,032

8,758

106,919

30.3

115,678

1,484

878

10.0

114,967

29.0

137

-1,788

115,678

2017E

727

10,115

10,842

139,309

30.3

150,151

2,122

922

5.0

148,993

29.6

137

-2,024

150,151

(INR Million)

2018E

727

12,788

13,515

180,041

29.2

193,556

2,185

968

5.0

192,557

29.2

137

-2,291

193,556

Assumptions

Loan Growth

Borrowings Growth

Investments Growth

Dividend

E: MOSL Estimates

29.5

27.5

5.9

2.2

28.0

29.3

-29.5

2.3

33.7

28.3

166.6

2.5

28.9

31.2

-18.7

1.5

27.2

27.4

50.7

2.0

29.0

30.3

10.0

2.1

29.6

30.3

5.0

2.7

(%)

29.2

5.0

3.4

2 September 2015

GRUH Finance

Financials and valuations

Ratios

Y/E March

Spreads Analysis (%)

Avg. Yield on Earning Assets

Avg. Cost-Int. Bear. Liab.

Interest Spread

Net Interest Margin

Profitability Ratios (%)

RoAE

RoAA

Int. Expended/Int.Earned

Other Inc./Net Income

Efficiency Ratios (%)

Fees/Operating income

Op. Exps./Net Income

Empl. Cost/Op. Exps.

Asset-Liability Profile (%)

Loans/Borrowings Ratio

Debt/Equity (x)

Gross NPAs

Gross NPAs to Adv.

Net NPAs

Net NPAs to Adv.

2011

11.7

7.6

4.1

4.8

2012

13.0

9.1

3.9

4.7

2013

12.9

9.3

3.6

4.5

2014

13.1

9.6

3.5

4.3

2015

12.8

9.3

3.6

4.3

2016E

12.6

9.2

3.4

4.1

2017E

12.4

9.1

3.3

4.0

2018E

12.4

9.1

3.3

3.9

31.4

3.0

58.9

0.9

34.2

3.1

63.9

2.9

33.3

2.9

65.4

0.9

32.2

2.8

66.9

0.2

30.9

2.5

66.4

0.1

31.9

2.4

67.2

0.1

32.8

2.4

68.0

0.1

33.8

2.4

68.4

0.1

4.1

20.0

49.1

3.5

19.2

50.2

3.6

18.8

50.6

3.3

18.4

57.0

3.2

16.7

55.0

3.3

16.2

55.1

3.4

15.6

55.2

3.2

14.9

55.3

107.2

9.3

259

0.8

-21

0.0

106.2

9.9

211

0.5

-184

0.0

110.7

10.0

176

0.3

0.1

108.8

10.6

189

0.3

0.0

108.6

11.5

251

0.3

0.0

107.5

12.2

295

0.3

0.0

107.0

12.8

353

0.2

0.0

107.0

13.3

427

0.2

0.0

Valuation

Book Value (INR)

Price-BV (x)

Adjusted BV (INR)

Price-ABV (x)

EPS (INR)

EPS Growth (%)

Price-Earnings (x)

OPS (INR)

OPS Growth (%)

Price-OP (x)

E: MOSL Estimates

9.0

12.8

9.1

12.8

2.6

31.1

44.6

3.6

22.5

31.8

10.9

10.6

11.3

10.3

3.4

31.0

34.0

4.7

28.0

24.8

13.8

8.4

13.7

8.5

4.1

19.9

28.4

5.6

19.7

20.7

16.9

6.9

16.9

6.9

4.9

20.2

23.6

6.9

22.5

16.9

19.6

11.8

19.6

11.8

5.6

14.2

41.4

8.8

27.9

26.5

24.1

9.6

24.1

9.6

7.0

24.3

33.3

10.9

24.1

21.3

29.8

7.8

29.8

7.8

8.8

26.8

26.3

13.8

26.4

16.9

37.2

6.2

37.2

6.2

11.3

28.3

20.5

17.6

27.7

13.2

2 September 2015

This document has been prepared by Motilal Oswal Securities Limited (hereinafter referred to as Most) to provide information about the company(ies) and/sector(s), if any, covered in the report and may be distributed

GRUH Finance

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