GRUH Finance - mini HDFC

This is going to be a huge problem for NBFC if its not going to exempted from this requirement with new changes coming in At the April end

Please provide your insights on how this affects GRUH

Time Correction has already happened in Gruh. Whole of last year it was stagnant. In my view, falling interest rates and focus on low housing (refer BJP Manifesto) may prove to be next triggers.

Bonus is probably just a sentiment changer (may be management did it to target the stagnancy that the stock was going through).

As of Mar’13 - Gruh had only 500 Crores of Debentures out of roughly 4,800 Crore Borrowing (~10%)

Moreover this were expiring on Mar’14 - so atleast the new rules wont affect these debentures.

For Gruh the main source of borrowing is National Housing Bank (but here the margin spread is limited as per laws). Im sure they will come up with new ways of financing.

Moreoever, the industry is making a recommendation to change this proviso in the Companies Law (this appears a mistake in the drafting of the act)

With each new investor presentation i see from the Gruh Finance, the big picture keeps getting more clear for me. That kind of keeps reaffirming my faith, that this is a long term story. Here is short summary of few points from this year’s presentation :

)- Cumulative Housing Units Financed (since 1988) : 2,55,551

)- Cumulative Disbursement (since 1988) :12,094 Cr.

)- Outstanding Loan Assets : 7009 Cr. (Gross NPA : 18.87 Cr. or 0.27%)

)- Loan disbursement during the year - **2577 Cr. **(Rural area - 1137 cr.)

)- Retail Network of 142 offices across **7 states (only?), **96.12% of loan assets are from 5 states (only?).

)- Housing units shortage of 18.78 mn in Urban areas & 43.67 mn in rural areas (no idea on the sourcequotedhere)

)- Average loan to value ratio : 66%

)- 92.15% of the loan assets is towards the individual home owners

)- 99.3% of loans on variable rates.

)- Average duration of loan is 196 months (16 year 3 months)

)- Average loan disbursed per unit : 7.64 lacs (up from 7.36 lacs last year)

)- Year ending Book Value : 33.83 (currently at 8 times books value FY15 - assuming 25% growth in BV)

And now the most the ridiculous point from presentation : FI,MF & Banks holding of the company’s shares : 0.67%.& FII holding 17.46%.

This is a perfect con job from our DII’s industry which likes to hold all kind of companies but not these kind of compounding machines. Thankfully individuals hold 17.66% including yours truly :slight_smile:

Well compiled Raja…Lot of Data points captured and presented nicely. This stock needs to be discussed and dissected more properly at VP

My question to the VP tracking this stock is - why is HDFC (parent Co of GRUH) at cheaper valuations than GRUH itself? Arguments in favor of HDFC

1). Cheaper Valuations than GRUH

2). Much Larger Balance Sheet Size with same business Model

3). Holding Co of HDFC Bank, HDFC Life & GRUH

So why HDFC is not a better bet Vs GRUH?

@Ronak: Not trying to state whether HDFC or Gruh is better than other. Just few points in favor of Gruh

1). Much higher ROE than HDFC. ROE of 30+ vs. 20 of HDFC

2). Gruh growing at 25-30% vs. 18-20% of HDFC

3). Gruh’s low ticket mortgage finance has much lower competition than HDFC’s mainstream mortgages. Hence Gruh has been managing higher ROA, NIM and ROE’s than HDFC.

4). HDFC being largest mortgage financier in country can only grow as much as overall market. Gruh’s size is much smaller to potential market it can cater to. So longer term growth rate can be sustained.

Kupu contentarea

Ronak,

Let me try to answer your question based on my understanding. Your question is based on the assumption that the business model between the 2 is same. Broadly speaking, yes, you are right. But “Business model” is a big word really. Let me highlight few things which you can read & think about :

i) what are the market segments targeted by these two. Are they really same/different ? How?

ii) Why the market being targeted by Gruh can still be considered untapped vis a vis the market targeted by HDFC.

iii) Why one has a better chance to grow at a higher rate for longer periods than the other.

iv) Why the market being targeted by HDFC can be considered crowded with all & sundry Banks and the market targeted by Gruh still has only few players. What are the economics/logistics at work.

v) Why it’s difficult even if another institution wanted to break into the Gruh market, it will still take years to learn the tricks of the rope and will have come out with a different cost model. I think if you read the AR’s of both and keep searching for answer to these questions you will have found the reply to your queries as well.

Regards

I’m not for GRUH or against. Want to understand the valuations. There is no doubt that GRUH is a better business than HDFC and Mr. Market also thinks so.

1). HDFC has the 22.8% stake in HDFC bank, 59.8% in HDFC AMC business, 72.4% in HDFC Life, 73.9% in HDFC Ergo and 59.7% stake in GRUH finance. AMC & Insurance business would’ve higher growth than mortgage business. 33%+ of HDFC’s EPS comes from its subsidiaries and that number is increasing by the year.

2). GRUH trades at 35 times and HDFC trades at 18 times. Just looking at these and assuming without any knowledge about the company, I would’ve thought that GRUH is a FMCG company. After the end of this market rally it would be interesting if it trades like an internet company! Valuations are really rich however I wish to valuate P/B value, P/E or M Cap / Sales.

I don’t see why GRUH is a trading at such a hefty premium but of course, Mr. Market is always right (over long period of time) and would be happy to be proved wrong. I feel it is a great stock to hold on for existing investors.

I feel we are here to look for better investment opportunities rather than looking for buy a great business at (what I feel, a terrible) valuation. What would be a better investment among the two? Would you buy a 23% ROE, 20% growing stock at 18 times or 33% ROE, 25% growing stock at 35 times?

If a father has more money and the son has little less money, who should be kidnapped for prosperous future?

~Crime Patrol

Lol Supratik, good one.

@Ashwin, After reading your question I had thought of putting up a table somewhat similar to the table below. But strange co-incidence that tonight I am on page 162 of Basanjti's wonderful book "The thoughtful Investor" and here is how he presents it. (Assuming am allowed to reproduce a section here?).

The above table is about 2 companies A & B, or Super Fast 30% LTD and SLOW & STEADY 18% LTD. Assumption is A is super growth, high RoE company capable of growing 30% for next 10 years available at 40PE and B is moderate growth, moderate RoE company available at 20 PE and capable of growing 18% over the same period. Also, it's assumed at the end of 10 years A will be available at 24 PE. As you can see, the result is, a price CAGR difference of 6% over 10 years between A & B. This can make a difference of over3 times to the wealth.

The disclaimer from him is, over the periodthe growth hypothesis shouldn't be violated and more often, the business model along with the industry environment will provide the best forecast on the long term sustainability of growth. -Which is what, my post on last Wednesday was trying to provide.

By the way, while about half way through the book (at page 162/427) i can say, it's one of the must read books for growth investors in India.

@ Raj,

Thanks for the illustrations. Got the drift. Wish investing was that easy. Simple, it looks but… Thanks for the heads up on the book as well.

Ashwin,

Theres a logical way to look at the valuation.

Assume you are a young boy (you could be already, its a assumtion) and just started the search for a most beautiful, smart, intellignet, wealthyand well cultured girl as your partner. Now assume somehow present possibilities i.e. set of availableprospects might not offer you all these assets. In this case, i guess you will look at the available choices and search for best fit wrt your expectations and be happy with whatever you got.

So moral of the story is valuation shouldnt be looked in isolation. I mean suppose you want to buy GRUH then best approach would be compare it with other companies in the same sector. This analysis will lead you to logical conclusion that GRUH is well ahead of its peers in terms of typical parameters like Mgmt quality, Scalability, Growth consistancy, corporate governance and so on. Due to all such diffrentiators market is ok to accord it a hefty premium.

Bottomline is if Tajmahal is available for sale then irrespective of any factor it will always trade it hefty premium to any other similar monumnet of India!

Hope it helps.

Loved your explanation Manish. Very well put.

wealthyand availableprospects

** So isolation. **

** Bottomline India! **

Superb!!..

Wish had a like symbol here as in fb…

Was reading past ARs of Repco and GRUH.


GRUH
Repco
Cost to Income
~19% ~19%
ROE 33% 18%
(due to equity infusion, ~22% otherwise)
GNPA 0.3% 1.5% (coming down)
NNPA
0 0.7%
Dividend Payout
30% ~10% (interesting as initially it is the "cheapest" cost of funding)
Reach
7 states (huge potential in TN and other untapped areas)
9 states (huge potential again; 65% revenue from TN only)
Ticket size
~7-8 lac (more to gain from affordable housing theme and lower delinquencies of borrowers)
~11 lac
PE
40x (haha, I myself posted about this earlier, keeps on expanding)
24x

I've build conviction on GRUH and might buy at CMP. I'm in for the long run and feel no point timing. At the moment I'm 100% invested (as a policy I don't use leverage other than interest free/6% SI loan without any margin requirements from my employer) and have no surplus cash to buy so might wait out or book profits from HDFC/LIC HF and add to GRUH.

Views invited and point out if you feel Repco is a better buy (if one's holding period if however).

Hi Ashwin,

Well, Gruh is big in the West and Repco in the South. Why not invest in both and benefit from the combined coverage? That’s what I’ve done.

)- HG

Hi HG,

I’ve issues (maybe not valid, views invited) with Repco.

1). After 28 years GRUH has around 15-20% more branches than Repco which is around 13 years or so. Repco is adding more branches every year than GRUH. GRUH mentioned in one of its AR than they have closed 2 branches. In fact they’ve closed the branch in Pollachi (TN). Or if we compare cost to income ratio it is similar suggesting GRUH is little more conservative? AP business is already stressed for Repco. With Telangana formation, it is yet to seen how this pans out.

2). Repco HF is promoted by Repco Bank (a PSU) whereas GRUH is from HDFC family. We all know how inefficient PSUs are.

3). I guess we should not be carried over by the higher growth rate of Repco as the base is low.

Arguments in favour of Repco:

1). I think Repco’s ROE is set to improve as they are yet to tap NCD and CP route for funding. Further we are seeing a steady decrease in NPAs.

2). 24x valuations versus 40x valuations for near similar market size.

Views invited.

@ Raj Panda

,

I’ve read The Thoughtful Investor

and it is a good read. :smiley:

My comments below -

1).

POssible. But as long as the expansion is calibrated, it should be fine. Do you see signs that they are expanding too fast?

Mgmt isnt expecting much from AP in FY15. See recent commentary -

2).

Mgmt quality is a variable open to interpretation. Canfin also is PSU bank promoted. Even DHFL supposedly had promoter overhang till Jhunjhunwala got in.

2).

I actually hope that the gap takes time to fill :slight_smile:

Some other articles that you might like to read (if you haven’t already)

http://www.valueresearchonline.com/story/h2_storyView.asp?str=25223

Hi HG,

I feel Repco is undervalued with respect to GRUH but when we talk of holding for the long run (unless I need cash or business metrics change) will Repco keep up with GRUH? I own LIC HF and from the time I bought it and till now it has managed to beat GRUH. Would LIC HF beat GRUH in 5-7 years period? I’ve no idea though I feel LIC HF is tad undervalued even now for the performance it is clocking.

GRUH traditionally have been conservative. During 2008-09 when banks/NBFCs (even ICICI Bank) gave teaser loan at 8%, GRUH refrained from such tactics. Only in hindsight we can say if Repco branch expansion is a good move or not.

Also I request experts on the view of low dividend payout. At first sight it is good as it is a cheap source of fund for atleast when the business is in initial stages of growth. GRUH has not gone for equity dilution in the recent past and able to payout 30% of profits and still grow upwards of 25% every year.

Thanks for the links. I’ve read those articles before.

Received an email from SEC@gruh.com forUnaudited Financial Results for the Quarter ended June 30, 2014

Dear Shareholder,

We are pleased to inform you that the Unaudited Financial Results for the Quarter ended 30TH June, 2014, have been approved by the Board of Directors of the Company at its meeting held on 17TH July, 2014.

The performance on the key financial parameters is as follows:

(Rs. in crores)

Particulars

Quarter ended

June 30, 2014

Quarter ended

June 30, 2013

Growth

%

Net Interest Margin

77.41

61.17

27%

Operating Profit

72.22

54.02

34%

Profit Before Tax

61.52

44.83

37%

Profit After Tax

41.91

33.77

24%

Loan Assets

7377.94

5727.21

29%

Loan Disbursements

690.03

566.86

22%

A copy of the said results is attached for your information. You may also access the Press Release issued in this regard from the website of the Company at www.gruh.com