GRUH Finance - mini HDFC


(Subash Nayak) #1

Hi,

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.


(Sunil Bakshi) #2

Very expensive stock in my humble view.

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).

I cant see any margin of safety here.

1).

2).

3).

4).

5).


(Subash Nayak) #3

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.

http://www.theequitydesk.com/forum/forum_posts.asp?TID=1186&PN=25


(Sunil Bakshi) #4

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).


(Hitesh Patel) #5

GRUH FINANCE LTD.

Market cap 3340 crores.

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.


(Hitesh Patel) #6

GRUH FINANCE LTD.

Market cap 3340 crores.

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.


(Raj Panda) #7

Hi Hitesh,

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.


(Rudra Chowdhury) #8

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.


(Vinod MS) #9

Hi,

I too beleive that Gruh is over-valued for the foll reasons:

  1. 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.

  2. 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.

  3. 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.

Cheers

Vinod

Disc: DHFL forms 7% of my portfolio


(Kuntal Sharma) #10

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.

Can you please provide your comment to the thread started by Nelson at http://www.valuepickr.com/forum/untested-worth-a-look/24764059

Apologies Hitesh (and sincere thanks to you).

Kuntal

Disc - Holding it from level of 230, 5% of portfolio

… regulatedbusiness Theworst case fraudis Ithappenedin


(Vivek Gautam) #11

http://www.hdfcsec.com/Research/ResearchDetails.aspx?report_id=2988309

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.

Views Invited.


(Excel Monkey) #12

This is what I mailed to friends a few months back on DHFL when it was quoting at 150-160 levels:

I stopped following this name after they acquired First Blue

now the valuations have become so low that I was forced to again take a look at this name

I hope you are familiar with Dewah Housing

DHFL is the third largert mortgage finance company with focus on mid and low segment this segment is undeserved and commands a higher yields compared to normal home loans

because of lower tick size the cost to income ratio is higher as compared to HDFC or LIC housing

though DHFL yields are higher they have been generating a ROA of 1.4% which is lower that of HDFC and LIC the reason for the same is their higher cost of funds which is about 100-150 bps higher as compared to other two players

the difference arises because of the credit rating

DHFL has a AA credit rating where as both LIC and HDFC are rated AAA

though their Tier1 ratio is healthy 13% and LTV is around 65% rating agencies are still vary of offering them more favourable ratings

as of end of FY2012 they had total assets of around 27K crores and a loan book of around 25K crores which is poised to cross 30K crore mark next year

one of the reasons management gives for acquiring first blue was to scale the size of book quickly and gain AAA rating

currently they are doing a ROE of 17% on full equity and 20% on adjusted equity (taking out the goodwill they paid for first blue)

their ROE would explode to 25% on full equity and 30% on adjusted equity (taking out the goodwill they paid for first blue) if they are able to attain a AAA ratings

this business is a very high margins business

even better than HDFCs core mortgage business (taking out their high margin builder loans) it is like subprime kind of loans but very safe as the LTV is very conservative

currently DHFL quoting at P/Adj book of 1 times FY 2012 and P/Adj book of 0.9 time

DHFL can easily command a P/B of 3 if the rating story materialises

the same might take a year or two but I think eventually they would eventually attain a AAA

Corporate governance Wadhawan cousins have split is a good thing which has happened to DHFL

controversial HDIL is owned by cousin and I would say it is good riddance

the entire focus of the management lead by Kapil Wadhawan is now on DHFL

they sold their retail business a few years back

I have gained more and more comfort with the management after goinng through conf call transcripts

they are merging First Blue with DHFL

the minority stake holders of first blue (Kapil and a fund) would be allotted 10.8 crore shares of DHFL for their 350 crore investment

that is average cost of Rs. 320 per share for them in DHFL

this decision is minority friendly

concerns: the company has been named in an IB report (as reported by media) as one of the stocks being manipulated by Ketan Parekh

company has denied the same and the stock has corrected since

do let me know if you would like to see a detailed broker report on the name?

Disclosure: please do your own due diligence before taking a plunge. I an yet to initiate a position in this name


(Vishal) #13

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.


(PRASAD V. K.) #14

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.

Thanks


(Deepak Swamy) #15

Q3/Fy-13 Results out…

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.

Reported 9-month EPS 4.66 v/s 3.67 (Fy/11-12: 6.80)

At 02:30 pm on 15/01/2013, stock on BSE trading at Rs. 233/- Down 3%.


(PRASAD V. K.) #16

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.


(Raj Panda) #17

What EPS can we expect for FY13 ?


(Shashi) #18

A very good report on Gruh

https://docs.google.com/file/d/0B28aSZVmNP7eeTRNUmZwbG9WTms/edit


(Raj Panda) #19

Forbes article on Gruh


(Hitesh Patel) #20

I think 8- 8.5 per share seems achievable for fy 13.