REPCO Home Finance - IPO Note - Angel Broking

Operates in attractive loan segment - Priority sector home loans: RHFL is largely focused on providing home loans in tier-II and tier-III cities (with a sub-Rs. 10lakh average loan ticket size), due to which a large part of its book qualifies as priority sector lending (PSL) for banks. In our view, NBFCs operating in PSL segments enjoy competitive advantages, as most banks (especially in the private sector) have a perennial shortage in meeting their PSL targets, creating favorable demand-supply dynamics for those NBFCs that can source higher-yielding PSL loans at reasonable asset quality.

REPCO's loan book profile also allows it to procure 44% of its total borrowing via low-cost NHB refinance averaging about 7.5-8% (NHB refinance is available under various schemes, primarily for rural loans upto Rs. 15lakh and also for low cost urban housing loans up to Rs. 10lakhs). Moreover, the funding that it gets from banks in turn largely qualifies as PSL for the banks (loans by banks to NBFCs, which are on-lent as home loans less than Rs. 10lakhs qualify as PSL). This makes it attractive for banks to lend to RHFL at a reasonable cost (about 100bps above base rate), as against alternatives such as parking funds under RIDF at extremely low yields, to meet their PSL targets. Relatively low-cost NHB and bank funding enables it to maintain healthy margins and return ratios (NIMs at 3.8% and RoE at 22.2% in 1HFY2013, calculated on an annualized basis)

In terms of borrower profile, around 53% of RHFL's outstanding loan book constituted loans to relatively higher-yielding higher-risk non-salaried segment. To mitigate risks, the company, lends at a low LTV of about 65%, as per the management. In terms of geographical presence, 67% and 98% of its business is concentrated in Tamil Nadu and South India, respectively, largely in tier-II and tier-III cities.

Management expects strong growth to continue: Over FY2008-12, the company grew its loan book at a CAGR of 43.8% (albeit on a small base) to Rs. 2,802cr, driving PAT CAGR of 43.3%. As of September 30, 2012, its CRAR stood at a comfortable 15.9% (entirely tier-I). Further, IPO proceeds would increase its capital base by nearly 0.9x, providing enough headroom for maintaining strong loan growth for the next few years as well. Funding mix is also expected to remain stable (In FY2014 NHB refinance facility for Rural housing fund increased by 50% to Rs. 6,000cr; bank demand for PSL opportunities is also expected to remain strong and future outlook is favorable, in our view, given government's priority sector focus).

Outlook & Valuation: RHFL generated 22.2% RoE in 1HFY2013E and would trade at 1.8x FY2013E ABV (at the upper end of its price band, based on post-issue networth). Closest comparable peer - Gruh HF (mainly western India, rural and semi-urban focus, largely PSL qualifying home loans) appears extremely expensive at valuations of 7.3x FY2013E BV, notwithstanding its ~30% earnings growth trajectory and ~35% ROEs (FY2013E). Other NBFCs like Mahindra Finance and Shriram Transport Finance operating in different priority sector segments to a varying degree and generating similar return ratios, are trading at 2.6x and 2.3x FY2013E ABV, respectively (but they have larger, relatively more seasoned loan books and longer proven track record). Overall, keeping in mind RHFL's attractive niche loan segment, strong growth prospects and reasonable valuations, we recommend subscribe to the issue at the upper band.

Source : Equity Bulls

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