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Repco

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Presented by
Juno
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Main Features
 Niche focus on Tier II & Tier III cities

 Largest HFC in South India serving self-employed

 Maintains the highest CAR in the sector

 Earns the highest NIM across all HFC’s

 Loan book expanded by about 28% in 2015

Ownership changes y-o-y


 FIIs increased their ownership by staggering 16.52%
 Mutual funds also increased their holding by 4.13%
 Promoter ownership remained same at 37.25%
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Recommendation

Target Price: Rs 811

Upside: 16%
BUY Superior Return
Ratios viz. RoA driven
by industry leading
Expertise in serving niche Net Interest Margin
& under-penetrated self-
employed viz. highest
16% proportion of non-salaried
Upside loans (57%)
High capitalization & Low
leverage providing ample
scope for loan book growth
@30% CAGR
Holding Period Return
End of 2016 End of 2017 End of 2018

16% 21.4% 30%


Target Price (12 M) Current Price Closing Price (12 M)
(at 28-Oct-15)
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Business Description 2014 :: Loan book


worth INR 40 Billion
2000 :: Incorporated 2007 :: Investment with 82 branches,
as Repco Finance by Carlyle group Carlyle group exits
Limited worth $27.7 Million Repco

2003 :: Loan 2013 :: IPO and 2015 :: Loan book


Book rating upgrade grew by 28% to INR
crossed INR by ICRA to AA- 60 Billion in 1 year
1 Billion with 142 branches
nationwide

Robust business model with niche focus


 Innovative Loan Products serving the under-penetrated self-  Diversified source of funds and increasing share of
employed and non-salaried segment NCD’s and CP’s

 Well-recognized brand in Southern India with 142 branches  Stable expansion strategy with addition of 12-15 new
branches every year
 Low operating costs with lean branch model and centralized
loan process
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Business Description Targeting lower competition segments and markets


through direct customer centric approach
Diversified source of funding

 Commercial papers will offset Repco


bank borrowings to some extent

 In a following interest scenario, NCDs will


dominate incremental borrowings

 Stable network expansion strategy


followed
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Multiple Drivers for Housing Finance companies


Industry Overview

Total Urban Housing


shortage of 18.78 Mn units

Lack of formal finance in


low-middle income segment

 9% of rural housing demand


met by formal lending
sources

 91% of houses built using


own funds
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Industry Overview
Factors favoring growth of Housing Finance Companies (HFC’s)

 Increased reach
 Aggressive marketing
 Expertise in sourcing & appraisal of housing loans
 Subsidized rates for funding to HFC’s through NHB

Factors NOT favoring traditional banks in the low cost housing market

 Low ticket size in Tier II & Tier III cities


 Higher NPA levels
 Higher operating & collection costs
 Increase in LTV ratio for low-cost housing segment
 Increase in deduction of repayment of housing loans
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Large HFCs vs Small HFCs


Competitive positioning
What this means for small-medium HFC’s

SMALL HFC (Loan Book Size < 30000 cr.) LARGE HFC
Focus largely on Tier II & Tier III cities Focus mainly on Tier I cities Lower competition from banks and higher growth

More self-employed and non-salaried Salaried borrowers Opportunity to earn higher yields by 75-150 bps
borrowers
Proportion of bank borrowings for funding Higher proportion of Bonds and NCD’s Reduction in cost of borrowing by 100-150 bps
reducing over the years
Increasing efficiency in collection processes Asset quality almost constant Reducing GNPA levels and narrowing gap in asset
and risk control measures quality

Small HFC’s grew by 29% vs


22% of Large HFC’s in 2013-14
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Competitive positioning Repco vs Other HFC’s


Highest NIM
of 12.5% +
Highest
proportion of Highest CAR
non-salaried 20%
segment 57%

Lowest Cost- Highest GNPA &


to-income ROA over NNPA higher
ratio of 20% last 5 than peers
years

Repco scores higher than its peers on all parameters except


for its GNPA and NNPA levels which are higher than the
industry average
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Financial Analysis
Spread will determine competitiveness driven by:
 Higher yields from non-salaried customers
 Cost of funds will go down by 50-70 bps by FY17-18:
 RBI’s recent policy rate cuts
 Increasing share of borrowing from NCD’s and CP’s
 Improved credit rating due to diversified borrowing

Company likely to maintain spread despite passing 30-40 bps


to customers thereby increasing competitiveness

Loan disbursement growth to remain at 25% + till FY18


 Phased geographical expansion in Odisha, WB, Gujarat,
Maharashtra etc.
 Leveraging existing brand & customer profile for deeper
penetration in neighboring areas of existing branches
 Significant exposure and low penetration to the
underserved non-salaried segment
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Financial Analysis
Borrowings to grow @CAGR 25% without equity
dilution in FY15-20
 Current CAR of 20.26% well above regulatory requirement
 Current Leverage of 6.29 well below that of peers
 With borrowings CAGR of 25% over FY15-20, CAR will go down to
17.5% in FY20

Repco can easily support its loan book CAGR above 25%
through additional borrowings without affecting credit rating

ROA Tree Analysis


Repco RoA will be mainly driven by
 NIM @ 4.3%+ going forward
 Increase in provisions till FY18 for improving asset quality will
reduce RoA
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Financial Analysis
Strong NII and PAT growth
Repco is set to post strong EPS CAGR of 25% over the
 Repco’s NII is set to grow @28% CAGR driven by healthy
period FY15-20
NIM
 Increasing provision coverage is likely to post slight
pressure on PAT
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Relative Valuation
Multipliers P/B (x) P/E (x)
Assumptions for selecting Peers :

 All mid-tier HFC’s: DHFL, GRUH, CAN FIN HOMES, GIC Forward Years 2016 2017 2016 2017

 Companies like India Bulls, LICHF, and HDFC have not been Forward Value 5.2 4.5 31.1 26.1
considered due to higher LTV, different target segment(salaried),
different operating model etc. Weights for multipliers 100% 0%

 As per operating model, GRUH stands as the closest competitor


Target Price INR 811
Assumptions for Book Value of Equity:
 NIM to remain above 4.2%+

 Loan disbursement growth to remain @25% till FY18

 Borrowings will grow @25% CAGR till FY20 CAGR 20%

 Cost of Funds will go down by 50-70 bps by FY17-18

 Repco will be able to maintain spreads at 3%


Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Relative Valuation Repco trading at premium to industry multiples

Reasons for Repco to continue to trade at higher


multiple:
I. Low leverage and high capitalization leaves ample scope
for growth
II. Earn higher spreads by reducing borrowing costs through
NCD’s & CP’s

High payout ratio & its impact on Book value


GRUH vs Repco
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Relative Valuation
Reasons for Repco to continue to trade at higher
multiple:
III. Potential for RoE expansion without any further equity
dilution

IV. Increasing expertise in identifying good quality


customers will result in improving asset quality

 Repco has written off just 0.08% or INR 40 mn


 It’s loan book is securitized
 Highly successful in recovery process (90%)
 LAP to remain capped at 20% of loan book
 In-house credit quality checking

V. Industry leading RoA driven by strong NIM


Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Risk Analysis
Company Risk: CAMELS analysis

 Repco Home Finance has been analyzed based on its


operational, financial & compliance stability

 Liquidity, Management Efficiency & Asset Quality are key


areas of concern for REPCO whereas in terms of Capital
adequacy and Earnings, it ranks above most of its peers

 Going forward cost, volatile asset quality & cash position


are key metrics to look out for REPCO

Macro Risks: Decline in Economic outlook

 The growth in advances of REPCO has been around 25-30%

 A negative macroeconomic scenario can adversely impact


the robust growth in loans thus in turn the future growth
projections
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Risk Analysis
Strategic Risk: GRUH could emerge as serious competitor
 Repco is looking for growth in the Western Zone especially
Gujarat and Maharashtra states

 GRUH has quite similar strategy of targeting non-salaried


customers

 For GRUH the proportion of non-salaried loans stands at


37% which close to Repco's 57%
Regulatory Risk
 Repco is subject to rules and regulations mandated by Model Risk : Valuation Risks
National Housing Bank (NHB)
For arriving at our Target price we added a
 Regulatory changes such as interest rate cap on refinancing premium to the historical P/B assuming it would
facility, change in eligibility criteria under refinancing facility have lower borrowing cost, better Net interest
and change in risk weights can have negative impact on its margins and greater growth potential owing to its
earnings and growth potential expansionary outlook going forward
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Monte Carlo Simulation

Current Market Price


(as of 28th Oct): Rs 703
70
Monte Carlo Summarizing
60
Statistics In Rupees
50
Mean 875.59
40
30 10th Percentile 580.77
20 90th Percentile 1236.17
10
Volatility 31%
0
<=300 300- 400- 500- 600- 700- 800- 900- 1000- 1100- 1200- 1300- 1400- >1500
400 500 600 700 800 900 1000 1100 1200 1300 1400 1500
Industry Overview &
Company Overview Financial Analysis Valuation Risk Analysis Conclusion
Competitive Positioning

Conclusion
Expertise in serving
niche & under- Cost of capital to
penetrated self- reduce going forward
employed segment

High CAR will


Expansion will result
ensure healthy loan
in economies of scale
book growth w/o
further reducing the
dilution
cost-to-income %
BUY
12 M Target price Upside potential 3Y HPR
INR 811 16% 30%