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Stock Data No. of shares Market cap 52 week high/low Avg. daily vol. (6mth) Bloomberg code Reuters code : 17.80 Cr : Rs. 3871 Cr : Rs 250/ Rs 112 : 165,249 shares : GRFH IN : Gruh.BO
218 Target Price: Rs 266 Potential Upside: 22% Absolute Rating: BUY
CMP: Rs
Relative Performance
30000 20000 10000 0 Jan-12 BSE_SENSEX Jul-12 300 200 100 0 Jan-13 GRUH Finance Ltd
Pankit Shah
Asst. Vice President
Pankit.shah@enam.com (+91 22 6680 3623)
1 1
Indias rising work force shall lead to more demand for homes
1,000 (mn) (%) 66 64 62 60 58 56
Working pop
Ratio (RHS)
60% of Indias population is below 30 yrs of age and that along with rising middle class -- augurs well for housing finance industry
1,500 1,200 (mn)
Improving affordability
45 36 27 (Rs lacs) (%) 25 20 15 10 5 0 1995 1996 1997 1998 1999 2003 2004 2005 2006 2007 2008 2009 2010 2000 2001 2002 2011
900 18 600 300 0 1991 1995 2000 0-19 2001 20-45 2005 2010 46-60 2015 61+ 2020 9 0
Property Cost
Annual Income
Affordability (RHS)
Jaipur Jaipur
Kolkata Kolkata
A hmedabad Ah hmedabad
Bengaluru B Bengaluru
Chennai Chennai
Mumbai Mumbai
Bhopal Bhopal
Surat Surat
Pune Pune
10000 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13e
All India
S Special i lP Programmes
R l Employment Rural E l t
Oth Others
Company Background
Founded in 1986 by HDFC and AKFED, Gruh Finance is one of Indias leading housing finance providers focused in the rural and semi-urban sector. It is recognized by NHB as an eligible housing finance company for refinance facility since 1989 and became a subsidiary of HDFC in June 2000. Gruh has 121 retail offices across seven states of India i.e. Gujarat, Maharashtra, Karnataka, Madhya Pradesh, Rajasthan, Chhattisgarh and Tamil Nadu with first two forming more than 75% of total loan portfolio. Apart from extending home loans and repair loans under its Suraksha and Sajavat schemes respectively, Gruh Finance offers loans to families for purchase, construction, repair and renovation of non-residential properties like office premises, clinics etc under its Samruddhi scheme. The company has also introduced personal loans under the Sahyog scheme for its existing home loan customers with a view to meet their other financial needs like education, hospitalization, holiday travel and wedding against the mortgage of residential properties. Th The Company C h designed has d i d a new variant i of f home h l loan product d Gruh G h Suvidha S idh to meet the h requirement i of f a flexible fl ibl repayment plan for the self-employed and the skilled workers segment. Under this product, a customer is given an initial monthly installment that can match his present cash flows with an annual step up for each subsequent year over the tenure of the loan depending on likely future cash flow.
Promoters - Background
The senior management of the company is fairly experienced and is closely aligned with its parent company. The Board of Directors comprises of nine directors - three of whom are from HDFC. The company is led by Mr. Keki Mistry (Nonexecutive Chairman) and Mr. Sudhin Choksey (Managing Director). Keki Mistry: Chairman
Mr. Mistry is the non-executive Chairman of the company and the Vice-Chairman and CEO of HDFC Ltd. He has been on the board of Gruh since 2000 and is a member of the Audit and Compensation Committees.
Mr. Choksey has been on the board of Gruh since May 1996. He was made the CEO of the company in 1998 and the Managing Director in 2000. He is a member of the Investors Grievance Committee.
Other Directors
The company has 7 other directors all of which have been associated with the company for a fairly long time. The members on the board include Ms. Renu Karnad (Member of the Compensation Committee). Mr. K.G. Krishnamurthy (Managing Director & CEO of HDFC Property Ventures Ltd (HPVL), Mr. S.M. Palia: (Chairman of the Audit, Compensation and Investors Grievance Committees), Mr. Rohit Mehta (Member of the Audit Committee), Mr. Prafull Anubhai (Member of the Audit and Investors Grievance Committees), Mr. S.G. Mankad and Mr. Kamlesh Shah.
Investment Rationale
Niche presence in the semi-urban and rural areas of Gujarat and Maharashtra
Overall, the company operates 121 retail offices across seven states Gujarat and Maharashtra also accounted for +75% of the disbursements in FY12, with the balance coming from states like Madhya Pradesh, Karnataka, Rajasthan, Tamil Nadu and Chhattisgarh
Riding on strong housing demand, the company provides sustainable growth trajectory
Disbursements have grown at a CAGR of 26% and PAT at 32% over the last 5 years.
Well managed Asset Quality with 100% Loan coverage (Gross NPA of 0 0.52% 52% and Net NPA Nil) Robust NIMs backed by consistent operating performance
NIMs at ~ 5% in the last 2 years are amongst the best in the industry Cost to Income co e Ratio at o at less ess than t a 20% 0 is s lowest o est a among o g its ts peers pee s following o o gb branch a c based bus business ess model ode
Apart from conventional bank borrowings and re-finance facilities from NHB, the company has regularly tapped other financing sources such as NCDs, commercial paper and public deposits. In the last few years, GRUH has reduced its reliance on bank borrowings in favor of facilities from NHB. NHB The change in composition of the borrowing mix will help in drastically bringing down the borrowing cost for the company and hence aid the company in maintaining its robust margins in the years to follow. 6
Businessmen 18%
Professionals 2%
Gruh Finance is a small-sized, niche player in the housing finance market providing low ticket housing loans to customers from semiurban and rural areas. Gruh is primarily concentrated in the fast growing states of Gujarat and Maharashtra which account for more than 75% of disbursements. After the success in these 2 states, it has now commenced lending operations in Karnataka, Madhya Pradesh, Rajasthan, Chhattisgarh and Tamil Nadu. Overall, the company operates 121 retail offices across seven states. Given its pricing power in predominantly rural and semi-urban markets, Gruh is able to maintain its spread which protects its margins.
Gujarat, 39.67%
Maharashtra, 37.94%
57%
56%
56%
58%
Gruh Finance is likely to continue benefiting from rising rural cash flows on back of its expertise in semi-urban and rural areas and proven business model. Over 90% of loan portfolio comprises of individual housing loans with rural loans contributing 43%. Expansion into newer territories coupled with Maharashtra and Gujarats growing economy has helped Gruh Finance to step up its loan book . During FY07-12, the disbursements increased at a CAGR of 26% while loan assets grew at CAGR of 24%.
Disbursements
Considering growth potential in newly entered states and Gruhs building capability, we expect loan book growth of ~26% over FY13-15 with steady NIMs at ~5%.
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Gruh Presence
Gruhs loan book is characterized by middle-income borrowers, with modest ticket loans and comfortable Loan to Value Ratio. Given its large concentration in Tier II and Tier III city, the average size of loans offered by Gruh is small with more than 70% of the properties financed with loans of less than Rs. 10 lakhs. Over past 5 years, Gruh Finance has maintained Gross NPAs at ~1 along with 100% provisional coverage ratio. Efficient credit approval and recovery mechanisms along with strong cash flows have helped the company to keep Net NPAs at Nil, despite exposure to a risky segment. Most loan approvals passed stringent ratio criteria such as healthy loan-tovalue and installment to income ratios.
Well managed asset Quality (100% PCR and NIL Net NPAs)
100 100 100 100 100 100 100 100 100.0 1.4 1.1 0.9 1.1 0.8 1.0 1.0 1.0 90.0 80.0 70.0 60.0 0.0 FY07 120 0.0 FY08 0.0 FY09 0.0 FY10 0.0 FY11 0.0 FY12 0.0 FY13E 0.0 FY14E 50.0 2.0 1.6 1.2
PCR (%)
10
NIM (Calculated)
5 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E Operating Cost as % of Net Income
Source: Company, Axis Securities.
11
We expect Gruh Finance to report strong earnings over the next 3 years aided by solid loan book growth, stable NIMs and lower operating expenses. Consistent improvement in profit metrics is a reflection of strong traction in margins and tight control by the management over operating and credit costs. ROE has improved from 24% in FY07 to 34% in FY12 while ROA has expanded from 2.2% to 3.1% during this period. These best-in-class financial metrics reflect management quality and HDFCs philosophy, which is centered on achieving healthy metrics without taking undue risks and compromising on balance sheet quality. Gruh Finance has always been gradual in expanding its branch network We expect the company to add 15 branches and 60 network. employees every year.
2.5
RoA (%)
Dewan Housing GIC Housing LIC Housing HDFC GRUH Finance 0 05 0.5 1 15 1.5 2 25 2.5 3 1.6 2.9 3.2 35 3.5 1.6 3.25
The company is likely to witness steady improvement in operational efficiency over FY12-14. Productivity ratios such as business per branch, branch business per employee and profit per employee too would continue its steady growth path demonstrated over last 5 years. Consequently, return ratios would remain attractive.
12
GRUH Finance enjoys a stable and diversified funding profile, which is well supported by its parentage. Apart from conventional bank borrowings and re-finance facilities from NHB, the company has regularly tapped other financing sources such as NCDs, NCDs commercial paper and public deposits. deposits In the last few years, GRUH has reduced its reliance on bank borrowings in favor of facilities from NHB. The proportion of bank borrowings in total funding mix declined from 52.5% in FY07 to 34% in FY12. Moreover, the share of loans from NHB has increased from 17.4% to 49.0% during this period.
Source of Borrowing
Public Deposits 11.88% Subordinated Debt 1.04% NCD 3.70% National Housing Bank 49.40%
The change in composition of the borrowing mix will help in drastically g g down the borrowing g cost for the NBFC and hence aid the bringing company in maintaining its robust margins in the years to follow. Promoter backing ensures that GRUH is comfortably placed in terms of its financing requirements from both commercial banks and market instruments. Re-financing facilities from NHB provide further comfort. GRUHs strong credit ratings (AA+ - ICRA; AA+ - CRISIL), along with demonstrated support from the parent HDFC Ltd., enables it to raise funds at competitive rates. GRUH predominantly lends on floating rates (~99% of loan book is on floating basis), basis) which provides a significant leeway in passing on interest rate hikes to customers and hence, mitigates interest rate risks.
Banks 33.98%
13
Valuation
The stock trades at premium valuation of 8x FY13E and 6.3x FY14E P/ABV. Due to consistent growth prospects, stable performance, healthy margins and well managed asset quality, we believe that the stock would continue to trade at a premium multiplier. Gruh Finances operating performance in last 2 years has been quite remarkable delivering the best return ratios in the industry. The company has outperformed its parent company HDFC on parameters like return ratios and loan growth. We have valued the stock at 8x FY14E P/ABV which gives us the price target of Rs. 266 reflecting an upside of 22% to CMP. We expect the companys loan book to witness healthy CAGR of 24% during FY12-14 with steady NIMs at ~5%. We initiate coverage with a BUY rating on the stock.
20 00704
20 00804
20 00904
20 01004
20 01104
M onthly Price
20 01204
20 01301
Risk Factors
Any unfavorable change in policies such as cost of refinancing by NHB would adversely affect rural demand leading to rise in NPAs. y trades at p premium valuation on account of best in The stock currently class NIMs. Any increase in funding costs may adversely impact NIMs and hence reduce the target multiple.
Jan-13
Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12
Sharp deterioration in asset quality Sharp slowdown in loan growth Regulatory developments which may enhance the competitive pressure in the housing finance market
Gruh F inance
Source: Company, Axis Securities.
Mean
+ 1 STDDEV
-1 STDDEV
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Company Financials
Profit & Loss
Y/E March Interest Earned (A) Interest Expended Net Interest Income Non-Interest Income (B) - Sale of Investments - Other income Net Total Income Total Income (A+B) Operating Expenses - Staff Costs Operating Profit Profit including extraordinary income Provisions Profit after Provisions Tax PAT FY11 346 201 145 15 1 14 159 360 31 16 127 128 3 126 34 92 FY12 491 309 182 23 6 17 205 514 40 20 159 165 2 163 42 120 FY13E 647 434 213 27 6 21 240 674 47 25 187 193 6 187 52 135
(Rs cr)
FY14E 812 548 264 32 6 27 296 844 59 31 232 238 9 229 64 165
Key Ratios
Y/E March
Valuations EPS (Rs.) ROA ROE BV (Rs.) j BV ( (Rs.) ) Adj. 5 3.1 31.4 18 18 7 3.2 34.2 22 22 8 2.9 31.5 27 27
(%)
FY11 FY12 FY13E FY14E
9 2.8 31.2 33 33
Yields & Margins Average Yield on Advances Average Cost of Borrowing NIM 11.9 7.6 5.1 13.1 9.1 5.0 13.5 8.5 4.6 13.7 9.0 4.6
Asset Quality Net NPAs (Rs. Cr) Net NPAs (%) Provisioning Coverage (%) Capital Others Operating Cost as % of Net Income 20 20 20 20 0.0 0.0 100 0.0 0.0 100 0.0 0.0 100 0.0 0.0 100
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Company Financials
Balance Shet
Y/E March Capital Reserves and Surplus Networth Borrowings Total Liabilities A t Assets Cash with RBI and Call Money Investments Advances Fixed Assets Other Assets Total Assets 51 35 3,177 12 9 3,284 97 24 4,077 12 12 4,222 70 31 5,064 13 12 5,190 70 38 6,350 15 12 6,485 FY11 35 283 318 2,966 3,284 FY12 35 350 386 3,837 4,222 FY13E 35 435 471 4,719 5,190
(Rs cr)
FY14E 35 551 586 5,899 6,485
Growth (%) Growth in NII Growth in Net profit Growth in borrowings Growth in advances Growth in investment Source: Company, Axis Capital 25 33 28 29 6 26 32 29 28 -30 17 12 23 27 25 24 22 25 27 25
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Mumbai
201-A Laxmi Towers, , Bandra-Kurla Complex, p , Bandra (E), Mumbai - 400 051 (+91-22) 6680 3600
Baroda
GF 9 Silverline, Sayajiganj, 390 005 (+91-265) 302 6945
Chennai
11 Vijay Delux Apts., 7/4 First CIT Colony, Mylapore, Chennai 600 004 (+91-44) 3918 4228 / 3989 3626
Delhi
Unit No. 815 81 & 816 816, Ambadeep Building, Kasturba Gandhi Marg, New Delhi - 110001 (+91-11) 9818263885
Hyderabad
21 B Maheshwari Chambers 217 C Somajiguda, 500 082 (+91-40) 3065 8501
Indore
320 City Centre, 570, M.G. Road, Indore (M.P.) - 452 001 (+91-0731) 3916601
Kolkata
Om Towers, 4th Floor, 401, 32 Chowringhee Road Kolkata 700 071 ( (+91-33) ) 4005 6201
Pune (Shivajinagar)
1248 A , Goodluck Chowk Gymkhana, Shivajinagar, Pune 411 004 (+91-20) 3054 7125
Rajkot
Toral Building, Office no 308, 3rd Floor, Near Galaxy Hotel, 360001 (+91-281) 3200170
CopyrightinthisdocumentvestsexclusivelywithAXISSecuritiesLtd*. * The name of the company has changed to Axis Securities Limited in the records of Registrar of Companies, Mumbai. Awaiting approval for change of name from Exchanges and SEBI.
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Disclaimer of Axis Capital Limited: The document has been prepared by Axis Securities Limited (formerly Enam Securities Direct Private Limited) (the company). Axis Capital Limited (hereinafter referred to as ACL) has been permitted by the company to use the same and circulate it to its clients. This document is not, and should not be construed, as an offer to sell or solicitation to buy any securities in any jurisdiction. This document may not be reproduced, distributed or published, in whole or in part, without prior permission from the Company. ACL does not guarantee that the document is complete or accurate and it should not be relied on as such. Investors should make his/her own research, analysis and investigation as he/she deems fit and reliable to come at an independent evaluation of an investment (including the merits, demerits and risks involved), and should further take opinion of their own consultants, advisors to determine the advantages and risks of investment. ACL, its affiliates, group companies, directors, employees, agents or representatives shall not be held responsible, liable for any kind of consequential damages whether direct, indirect, special or consequential including but not limited to losses, lost revenue, lost profits, notional losses that may arise from or in connection with the use of the information in the document. Registered office address: Axis House, 8th Floor, Wadia International Center, Pandurang Budhkar Marg, Worli, Mumbai 400 025. SEBI Registration no : NSE (CM)INB 231387235, (FO)INF 231387235, (CDS)INE 231387235,BSE(CM)INB 011387330,(FO)INF011387330, ARN No. 51485 Main/Dealing office: Solaris,C Bldg., 6th floor, Opp. L&T Gate No. 6, Saki Vihar Road, Powai, Mumbai400072, Tel No.18001030808, Compliance Officer Details: Name: Anand Shaha, EMail ID: compliance.officer@axisdirect.in,Tel No: 02240754152.
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