Gruh Finance Limited - Master of hinterland financing - Antique

Gruh Finance Limited (Gruh), a subsidiary of HDFC, has many firsts to its credit, including the tag of being the most expensive stock in the Indian financial space in terms of price-to-book. Gruh has been the pioneer at financing India's non-urban housing landscape in Gujarat and Maharashtra and in the process, developed best-in-class business practices that include the combing growth model, the referral associate program, digital collection centers and peerless asset quality performance. While its historical financial performance is a reflection of these strengths, its well entrenched business model and relentless focus on its target segment leads us to believe that market share gains will continue to accrue over FY13-20E and earnings growth could surprise positively.

Our residual income analysis suggests that current stock price captures earnings growth of ~18% over FY13-35E and market share gain of more than 400bps, a feat we believe is not entirely unattainable. Its parent, HDFC and HDFC bank have posted far superior growth over past 15 years on a much higher base. In our opinion, Gruh is at a similar stage and its ability to profitably capitalize on the multiple opportunities in the form of penetration in newer states and an uptick in the INR6,500bn affordable housing segment could result in long period of super-normal earnings growth. Initiate with BUY and value the stock at INR270/share, discounting FY15E book value by 6.3x (21x EPS).

Opportunity size large, pressure on yields to be minimal

Given that ~31% of India's population resides in urban India, growth opportunities will emerge from affordable housing in existing urban areas and new housing requirement in tier-2 and tier-3 towns as urbanization accelerates. Gruh's focus on under-served borrowers will aid strong growth and stable yields over FY13-20E.

Lean operating model, asset quality control at the heart of super-normal profitability New branches inevitably start with a two member team, small carpet area and basic technology set-up. Sourcing through the referral associate network, system driven loan management and negligible proportion of cash collections culminates to a low cost operating model. Involvement of full time employee across the loan life cycle, system driven approach, cluster based sanctions, and incentive structure linked to portfolio performance builds in strong asset quality control. Gruh's GNPA as on March 2013 stands at 0.32%, the lowest amongst housing finance companies.

Valuations reflect the uniqueness of business model, maintain BUY

Earnings CAGR at 28% over FY10-13 coupled with +30% RoEs has resulted in steady rerating of the stock, with its 1 year forward book multiple expanding from 3x in FY11 to 8x in FY13. We believe that Gruh Finance is well poised to deliver earnings growth in excess of 20% for a very long time. Initiate with a BUY and assign a price target of INR270/share based on residual income analysis.

Source : Equity Bulls

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