Its intriguing to see so many divided opinions on Gruh. There are certainly valid reasons which make Gruh deserve the premium over other players but the question is how much of a premium.
I am tempted to quote few excellent books on how the supply side of a business fundamentally changes the dynamics of the business in the mid to long-term rather than the demand side. Demand-side story and potential of Indian housing market is already known to everybody and hence the supply side (also known as competiton) is rapidly increasing. For just one example, somebody like Piramal is also venturing into the same and plan to make a 10k+ cr book in this business in next few years. And this is just one example, there are many many more. Try to think in this way - that HFC business is low NPA, has high growth potential etc. etc. is known to everybody. If it is known to you - a small investor everyone knows it. So the competition is increasing big time. At one point of time, and especially with the digital and tech models penetration, transparency in pricing norms (all HFCs fool borrowers big time in a interest rate going down scenario with rates being decreased only for new customers) that will have to be set by regulator and increase in competiton manyfold will lead to rapid lowering of profitability as well as slower growth for individual players. That is what will happen in a big way, in my opinion, in the next say 2-10 years. But the problem is that markets are extremely myopic and also tend to extrapolate past into future. Do not underestimate the power of a smartphone and high speed data in the hands of Indian consumer. Gruh is not Coca-cola (perhaps few people think of Gruh like Coca-cola and Buffett’s inclination to never sell it - although it hasnt been a wise decision for him since 1990s when the stock became fully priced) - think of it from a customer point of view. While you may be in love of Gruh stock because it has only moved in one direction - does the customer really care about taking a loan from Gruh vs some other player. For customer, the only thing which matters is price, service and distribution. But I drink only Coke irrespective of anything. And I hate Pepsi. The moats around HFC business is shrinking in my view especially in this digital world.
Infact, financial space is ripe for disruption by technology players (one example of the same is how Zerodha from no where has now become the largest retail broker in India). I hope that financial players try to disrupt themselves by first reducing their profitability and focusing on scale rather than get disrupted.
In the end, Markets sometime remain crazy for long period of times and anybody justifying a P/B of 24 is crazy too. I feel best case scenario growth for somebody like Gruh maybe 20%-25% for the next decade but the profitability will come down and hence earnings per share growth will be less than 20% and hence they will also need to raise funds as their profitability wouldn’t be enough to fund the growth (there is just no way HFCs will continue to make 20%-30% RoE will competition coming in and with digitization making it very easy for borrrowers to compare and with many tech savvy players ready to disrupt). I just can’t believe so many young, hungry, energetic entrepreneurs in a sector with such low entry barriers will allow a no-brainer scenario of 25% growth as well as RoE. And unlike insurance where trust is key because customer needs to get paid, loan giving is an activity where customer needs to pay & servicability is increasingly becoming commoditized and hence pricing is supremely important. I foresee fall in profitability for most other lenders like private banks as well - some of these are earning RoAs of 2% and that’s just crazy and will not be allowed in a free market.
And coming back to initial question of how much premium is justified - Somebody gave an example of what happens if markets are shut for 5 years and that holding Gruh is so great etc. etc. I want to ask one question - say I bring you the entire Gruh management team and board of directors and put in 100 cr and come to you and say that okay I have got the entire Gruh management team, please pay 2400 cr and take over 100% of business with 100 cr in equity and unlimited lines of credit from HDFC Bank. Will you do that. Even though because of smaller size, it may be even a better growth story than Gruh is. I think the most optimistic PE funds will give you a valuation of 600 cr but no more.
PS - Somebody has said that predictions are difficult, especially about the future. So do your own research. I have no position or interest in Gruh but this is what I honestly think will play out.