I am not an expert in analyzing Banking/NBFC stocks. That is one of the reason why my portfolio has very less exposure. Few days back, while talking with Vivekji, he explained the business idea behind NBFC and asked me to look at the thread in TED (well, I am yet to look at it, busy reading Buffett’s annual letters). Hence I am using layman term to justify why GRUH should be considered as an investment choice.
Pros:
1). Promoted by HDFC, india’s leading pvt bank, and possibly most ethical, conservative and consistent financial institution
2). Caters to housing financing. Because of 20% upfront payment requirement, NPA is pretty low at around 0.6%
3). Consistent growth rate of 30%. Achieved 45% growth in disbursement, Consistent ROCE of 25%+
4). Small geographical presense (in Gujarat and Maharashtra mainly), Huge scope of geographic expansion
5). It is a psuedo play on India’s rising middle class. A house is the most expensive investment a middle class usually make.
Cons:
1). Fairly valued, or slightly over-valued, growth stock (substantially over-valued as compared to its peer, who doesn’t have a HDFC as a promoter), (Again Page, Titan, Bata, Nestle are fairly-valued and still giving good returns)
All seniors.
Please help me by doing a proper analysis of this stock, and giving your views.
At 8.5-9 times BV, it should rank as the most expensive Financial stock. Look at Mahindra Finance, its 3 times BV (agreed that it is not in housing finance as Gruh is but still the differential is huge).
Well as I say, I am not an expert in analysing Financial institution. But some very interesting discussion going on at TED thread, with people giving reasoning behind why it should command the valuation it is getting.
Yes I did go through the thread. There is someone giving example of Nestle giving 21% return when It was at 65 or so P.E. There is another example - Infosys, it was close to 90 PE and has given 4-5% returns in last 11 years. Infosys did wonderfully well in revenue growth after 2001 but yet gave low returns due to it being athigh P.E.
I bought Gruh around 2.5 years back when it was reasonably valued ( perhaps at 3-4 B.V), but will not touch it at this valuation (it was 37 (price adjusted for split then).
Outstanding shares
17.75 crore shares of Rs 2 each. Book value is 25.
GRUH FINANCE is a
subsidiary of HDFC Ltd.
Company is involved in providing housing finance with a
focus on rural regions and smaller towns and cities.
Gruh Finance has shown consistent growth in loan portfolio
and profits over many years and because of its small size, is likely to keep
continuing at the usual 25-30% CAGR over next many years.
Just to highlight the past performance, some snippets from
the latest AR show the following data points.
CAGR AS AT MARCH 12
PARTICULARS
3 YEARS
5 YEARS
7 YEARS
10 YEARS
LOAN ASSETS
25
24
26
24
NIM
28
28
30
25
PAT
34
32
32
31
some recent results comparision
period h1 fy 13 h1 fy 12 fy 12(12M) fy 11(12 M)
income 304 236 514 361
NP 54 41.4 120 91
ASSUMING 25% GROWTH IN NET PROFITS FOR FY 13, PROFITS FOR FY
13 COULD BE 150 CRORES AND BASED ON MARKET CAP OF 3340 CRORES THE STOCK IS
AVAILABLE AT A FORWARD PE OF 22-23 TIMES.
ROE FOR FY 13 SHOULD BE CLOSE TO 30 PLUS.
PRICE IS CORRECTING POST THE SEP QTR RESULTS AND STOCK HAS
COME DOWN FROM A HIGH OF 225 TO CMP OF AROUND 188 SINCE THE STOCK HAS FORMED A BEARISH
ENGULFING CANDLESTICK FOR THE WEEK, THERE COULD BE A CORRECTION LASTING 3-4 WEEKS WHICH COULD
OFFER EXCELLENT ENTRY POINTS FOR THE LONG TERM
INVESTOR.
GRUH going forward is not going to be as cheap as it was in the past. One has to gradually accumulate the stock as it corrects in the next few weeks.
Price to book valuation will always remain expensive in case of gruh. Some positives that come to mind are:
1. Easily understandable business run by honest and able management.
2. Nil NPA and likely to remain so unless property prices tank by 30-50% in near future.
3. Strong visibility for consistent growth.
Hence if bought at the right valuations this could form a strong anchor for a long term portfolio which should deliver 25-30% price appreciation for next few years. Only thing which one needs to be careful is not to buy when it has run up sharply. In face a contrarion approach to buy when stock is likely to correct due to short term issues would pay rich dividends.
Outstanding shares
17.75 crore shares of Rs 2 each. Book value is 25.
GRUH FINANCE is a
subsidiary of HDFC Ltd.
Company is involved in providing housing finance with a
focus on rural regions and smaller towns and cities.
Gruh Finance has shown consistent growth in loan portfolio
and profits over many years and because of its small size, is likely to keep
continuing at the usual 25-30% CAGR over next many years.
Just to highlight the past performance, some snippets from
the latest AR show the following data points.
CAGR AS AT MARCH 12
PARTICULARS
3 YEARS
5 YEARS
7 YEARS
10 YEARS
LOAN ASSETS
25
24
26
24
NIM
28
28
30
25
PAT
34
32
32
31
some recent results comparision
period h1 fy 13 h1 fy 12 fy 12(12M) fy 11(12 M)
income 304 236 514 361
NP 54 41.4 120 91
ASSUMING 25% GROWTH IN NET PROFITS FOR FY 13, PROFITS FOR FY
13 COULD BE 150 CRORES AND BASED ON MARKET CAP OF 3340 CRORES THE STOCK IS
AVAILABLE AT A FORWARD PE OF 22-23 TIMES.
ROE FOR FY 13 SHOULD BE CLOSE TO 30 PLUS.
PRICE IS CORRECTING POST THE SEP QTR RESULTS AND STOCK HAS
COME DOWN FROM A HIGH OF 225 TO CMP OF AROUND 188 SINCE THE STOCK HAS FORMED A BEARISH
ENGULFING CANDLESTICK FOR THE WEEK, THERE COULD BE A CORRECTION LASTING 3-4 WEEKS WHICH COULD
OFFER EXCELLENT ENTRY POINTS FOR THE LONG TERM
INVESTOR.
GRUH going forward is not going to be as cheap as it was in the past. One has to gradually accumulate the stock as it corrects in the next few weeks.
Price to book valuation will always remain expensive in case of gruh. Some positives that come to mind are:
1. Easily understandable business run by honest and able management.
2. Nil NPA and likely to remain so unless property prices tank by 30-50% in near future.
3. Strong visibility for consistent growth.
Hence if bought at the right valuations this could form a strong anchor for a long term portfolio which should deliver 25-30% price appreciation for next few years. Only thing which one needs to be careful is not to buy when it has run up sharply. In face a contrarion approach to buy when stock is likely to correct due to short term issues would pay rich dividends.
Thanks for your interesting techno funda tips in addition to your excellent business analysis skills. I completely agree with what you said. Just one point that I would like to point out is, regarding the risk to them from property prices tanking by 30-50 percent point. Their average loan per unit is just 6.07 lacs and their average cost per dwelling unit is just 10.43 lacs, due to the market they address. So I don’t think realty price correction will hit them that hard.
Disc: part of my core portfolio and looking to add more on correction.
In the last one year, a look at the Shareholding patterns reveals an interesting trend
Check here : http://www.bseindia.com/stock-share-price/gruh-finance-ltd/gruh-finance/511288/
The promoters are selling stake which is being lapped up by FIIs. Even the DIIs are cautious of this exorbitant price rise and selling stake.
Entity Sep-12 Sep-11
Promoters 59.90 60.37
FII 14.98 13.98
DII 1.72 1.83
Now let us look at GruH and its parent HDFC
Company
CMP
P/E
Market Cap (Cr)
Div Yld
CMP / BV
ROE
HDFC
740.25
25.75
110193.62
1.47
5.5
22.69
GRUH Finance Ltd.
188.15
25.2
3347.19
1.21
7.62
34.21
And their 10 year performances
GruH
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Trailing
CAGR 10Y
Sales
83.63
82.96
83.41
102.89
145.03
201.69
294
308.19
358.9
508.06
594.81
Growth (yoy)
-0.8%
0.5%
23.4%
41.0%
39.1%
45.8%
4.8%
16.5%
41.6%
20%
Operating Profit
71.07
71.43
71.53
87.94
124.88
181
270.48
275.08
327.13
475.16
545.15
Growth (yoy)
0.5%
0.1%
22.9%
42.0%
44.9%
49.4%
1.7%
18.9%
45.3%
21%
Net profit
10.19
12.11
16.64
21.68
29.61
42.34
50.28
68.96
91.51
120.34
132.8
Growth (yoy)
18.8%
37.4%
30.3%
36.6%
43.0%
18.8%
37.2%
32.7%
31.5%
28%
HDFC
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Trailing
CAGR 10Y
Sales
2953.1
3064.53
3399.88
4264.21
5875.5
8176.35
10994.79
11338.28
12852.93
17226.96
18450.96
Growth (yoy)
3.8%
10.9%
25.4%
37.8%
39.2%
34.5%
3.1%
13.4%
34.0%
19%
Operating Profit
2833.33
2921.28
3237.22
4066.82
5639.73
7887.48
10669.88
10982.6
12444.18
16716.27
17896.9
Growth (yoy)
3.1%
10.8%
25.6%
38.7%
39.9%
35.3%
2.9%
13.3%
34.3%
19%
Net profit
690.29
851.78
1036.59
1257.3
1570.38
2436.25
2282.54
2826.49
3534.96
4122.62
4280
Growth (yoy)
23.4%
21.7%
21.3%
24.9%
55.1%
-6.3%
23.8%
25.1%
16.6%
20%
Paying a premium for the predictable market leader HDFC is ok but what is there in GRUH to command a similar or even larger premium than it's parent ? If someone is willing to take that plunge why not buy HDFC itself rather than buying GRUH at 8 times book.
The nearest peers like LIC Housing finance are trading at 2.2 time book. Even for a small market cap player like GruH paying 4 times P/B is expensive. I see no justification at all in buying a housing finance company at 8 times book.
A much better bet would be to go with well performing banks like Yes/IndusInd or even HDFC bank itself if one does not mind paying a premium price.
I too beleive that Gruh is over-valued for the foll reasons:
As it is made out its not a rural/tier-3 subsidiary of HDFC which will expand into other locations. HDFC aquired it for its presence in the existing locations and there will be hardly any geographical expansion. HDFC has its own rural expansion plans and there already areseparate products and managers for this.
The growth will be very similar to HDFC’s growth as Rudra has already analysed before. It is more of market lead growth helped by periods of less activity by public sector banks.
Just look at Rudra’s valuation comparison with HDFC. But what you get when you buy HDFC is not just the housing loan business. You get 75% of one of India’s best insurance company, 24% of India’s largest bank by mkt cap, 75% stakein HDFC Ergo gen insurance com and a host of other companies like the AMC, Realty cos, CIBIL etc etc. There is huge value unlocking potential here. I fear there might be depression of NIM in the near term as HDFC will be forced to offer lower rates to existing customers, but that seems to be a smaller issue compared to the positives.
In this sector DHFL is my pick which is serious about growth and is aggressively expanding without major NPA concerns. I have heard corporate gov concerns…but do not feel that in this highly regulatedbusiness there is room for much issues. Theworst case fraudis what happened with LIC HF. Ithappenedin the project loans to builders and we all know what happened after the initial tanking of the share price of LICHF.
Since the comparision is being made for alternatives,posting it here:
Dear Vinod,
Inspite of the recent run-up, loosing conviction in DHFL which have not caught the market fancy inspite of it high RoE, consistent profit growth of around 44% in the last 5 years, P/BV = 1.07.
In the NBFC sector how does Future Capital now under management of Warburg Pincus being strongly recommended by HDFC Securites appear? Valuations are reasonable at 9 PE and 1.4 PBV .good management ,size of opportunity, trackrecord.
Gruh is one of the stocks where I am bullish on the company and not the stock ! Gruh was one of my first multi baggers, so is afavoritecompany of mine. Had bought it at Rs. 75 (pre split) in 2008-09 at 1.5 P/B and finally sold around Rs. 550-600 at 5-6 times book, which I found to be expensive. Only to see it trading at 10 P/B!! 10 P/B for a 25-30% compounder seems pretty absurd valuation to me. Coming from HDFC pedigree, the minimum they will grow is 20%, but also maximum they will grow is 30%.I think the moment growth is higher than that, management is likely to apply brake and also increase provisioning for future.
Disclosure: No exposure as of now, had switched to M & M Financial at around Rs. 610. Keen to invest again if comes to rational price, after suitable time/ price correction.
I feel judging a financial stock just by price to book is very old and conventional way. What one should concentrate is
1)If gruh decides to dilute equity at these prices it will have very less impact on number of shares added but huge impact on capital available for growth and further leveraging. Indusind is a similar case where stock has seen a rerating after it was able to dilute at high price to book. Hence it should be seen as a positive and not negative.Finance companies unlike other companies have to dilute equity to keep on growing and high price to book is a big positive for gruh. Those who feel that it is very high,are looking at in isolation and from static point of view. Future dynamics are not taken in acount.
2)NPA ratio for gruh in near to zero.
3)Unlike HDFC gruh mostly lends to small end users and mostly lends for buying properties in rural/semiurban and unban fring areas where valuations are not speculative and purpose of buying property is for occupation/self use and not as investment. HDFC lends to developers in metros also and is more exposed to housing bubble burst or set back for software/outsourcing sector.
4)Housing loan from banks requires income tax returns/service tax/sales tax receipts as proofs.A lot
of creditworthy people become unbankable to them and this is where NBFCS like gruh come into play.Compared to other NBFCS gruh is only company which has pure housing loan portfoio and parent like HDFC. Other good NBFCS come with baggage of com vehicle loans which are very risky in nature.
That makes it unique stock and justifies a premium because of rareness.At present market cap is around 3600 cr, only question one needs to ask oneself is, does the sector in which it operrates,the management which runs the company gives this stock a chance to becomes a 36000cr company after 10 years?if yes then one should leave emotions aside,do away with false comfort of buying something cheap and have a fresh look at the stock.
Net Int Inc up 28.7% to 64.82 Cr from 50.37 Cr.
Operating Profit up 30.7% to 52.36 Cr from 40.07 Cr.
Net Profit up 24% to 28.89 Cr from 23.3 Cr.
Disbursements up 50.1% to 530.75 Cr from 353.63 Cr.
Loan Assets up 33% to 5002.92 Cr from 3761.81 Cr.
Gross NPAs DOWN 4.1% to 26.74 Cr from 27.88 Cr (SQ 12)
Gross NPA at 0.53% against 0.60% (Sq-12)
Zero Net NPAs maintained.
9M/Fy-13 v/s 9M/Fy-12:
Net Int Inc up 19.4% to 174.99 Cr from 146.5 Cr
Operating Profit up 18.7% to 138.87 Cr from 116.98 Cr
Net Pr up 27.9% to 82.82 Cr from 64.77 Cr
Helped by decline in Provisions which is down 20% to 16.97 Cr from 21.22 Cr.
Gruh is setting a pace at which it wants to grow.It is good that they are not chasing mindless growth with high possible NPA. Infact if one studies journeys of HDFC,HDFC BANK and GRUH they are one and the same.They all grew at comfortable pace because of capturing policy of cream only,increasing profitability and reducing NPA.
