Gruh Finance Limited - 1QFY14 Results Review - Seasonality at play - Antique

Gruh Finance's Q1FY14 operational performance was lower than our estimates, primarily led by 40bps sequential decline in calculated yields. Traction in disbursements aided 32% YoY growth in loan book while asset quality witnessed a seasonal spike, with GNPAs increasing 14bps sequentially to 0.46%. The incremental GNPAs were completely provided (vs. regulatory requirement of 15%) in Q1FY14 and any future recovery would result in write-back of these provisions.

We would view the decline in spreads as a part of the lead-lag effect and believe that benefits from declining borrowing costs will accrue from Q2FY14 given that banks have cut base rates only towards the end of June. Deep penetration and huge hinterland opportunity will ensure 27% loan book CAGR over FY13-16E while strong pricing power and best-in-class liability profile will ensure stable spreads at 3.6% over FY13-16E. Relentless cost control and stringent asset quality control will aid earnings accrual at 26% CAGR. Maintain BUY with price target of INR270/share which discount FY15E earning by 18x.

Borrowing cost benefit to accrue with lag

Given that 100% of its assets are floating in nature while only 30% of liabilities are floating, benefits from declining borrowing costs will accrue with some lag. We expect borrowing costs to decline over H2FY14 given that 1) banks have cut base rates only towards the end of June, and 2) NHB refinance rates could re-price downward as interest rates start trending downwards. Bank borrowings constitute 28% of Gruh's total borrowings while NHB funding constitutes 47%. Pricing power in the hinterland coupled with strong credit rating will enable Gruh to sustain spreads at 3.6% over FY13-16E.

Asset quality witnesses seasonal spike

On a sequential basis, GNPAs increased from 0.32% in Mar-13 to 0.46% in Jun-13. We note that this is peculiar to Gruh's business model where-in GNPAs rise in the first quarter and gradually decline towards the end of fourth quarter. In-line with its conservative policy, the incremental GNPAs were fully provided. Solid understanding of local markets and stringent credit appraisal processes will ensure that credit costs will remain minimal (8-10bps) over FY13-16E.

Penetration driven growth continues

Through its combination of branch network and referral associate program, Gruh Finance continues to penetrate deeper within the country. As an illustration, it now covers 89% of talukas in Maharashtra (82% in FY12), 70% in Karnataka (63%) and 33% in Rajasthan (28%). Gruh Finance is also well poised to benefit from the thrust on affordable housing, especially in Rajasthan and Maharashtra. Given the small loan book size and the immense opportunity, we believe that high than system growth would continue for a very long time.

Source : Equity Bulls

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