GRUH Finance - mini HDFC

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Digging too much on mortage to GDP will miss the main point which is Gruh is a leader in this space and commands a very good position in the industry backed by its track record. If you doubt the core thesis of lending to non salaried people and wonder if the size of opportunity is indeed big enough then one must look at Shriram Transport Finance which lends to a similar segment (people without bank accounts) for used trucks/vans/cars (depreciating asset) and has demonstrated its scalability across the country. STFC’s market cap is 2x that of Gruh and still growing.

P.S: Shriram Transport is a wonderful business and I do not mean to undermine that at all.

While I agree with you on not comparing mortgage rates of US and India, your conclusions are contradictory. If real mortgage rates are worse in India crisis should have happened in India rather than US.

In reality, crisis precipitated because of large scale mortgage application fraud, stagnating real income and rising real interest rates before crisis. I don’t think any of these situations remotely exists in India. Even valuations are not outrageous. As an investor we are far away from the wrong side of the sword.

Regarding non-formal sector lending, we should consider it an opportunity since mortgage fundamentals are based on income potential rather than it is coming from formal or informal. We don’t have to go too far to have comparable business. Just check what was Sriram Transport Fin doing ten yrs back. They have created an empire out of lending to informal sector with absolute volatile income profile.

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without hurting any one’s sentiments, I’m surprised why this question of ‘having different subsidiary’ should be seen as something that needs investigation by Sherlock Holmes?! May be there is some reason, but why speculate that the reason behind this is with ulterior motives!!

“If you think like an owner, you will know why…”

Answer: The reason is, lending money with around 10 lakhs loan is a completely different ball game altogether. You cannot have same appraisal process, risk management systems for both! A company can manage both, but managing differently could lead to better business properties for each.

For example (1), in recent times Maruti has branded its newest small SUV (S Cross) under NEXA branding. Why? A premium customer requirements are different than a sub-premium customer. I’m not condescending anyone one. A premium customer looks at overall ownership experience like having a relationship manager, buying experience, features, ambience, while an Alto customer will come pay, take the car. (again no disrespect to Alto owner, just putting things in perspective).

Example 2: You cannot have a single relationship manager for customers with 10 crore net worth and customers with 50 lakhs because the requirements are completely different, the investment avenues for a 10 crore customer are too many, for example.

There is simply too much of background check/work that needs to be done while lending to a non-salaried customer, why a BIG bank like ICICI bother about this as their lending cream is with working capital loans, big ticket loans, developer loans. An HFC has only ONE business stream - LEND to low income, non-salaried, so they WILL have to take that pain of appraising a prospective customer.

Not sure, if I’m able to put what’s in my head into my writing. ANYWAY, this is not at all a point to consider while choosing to invest in HFCs, in my honest opinion and I could turn out to be an idiot but at the end at lease I would know why I became an idiot!

Well, my honest views, not posting towards anyone!

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Advantage of being classified as HFC is simple. You get finance from NHB. Banks have source of low cost CASA deposits. For HFC, low cost NHB funding is great to have.

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Absolutely, missed this NHB funding, which is critical. Good observation.

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Deleting post - as per mod request

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I think @richdreamz answered this well.

Did I say NHB funding is cheaper than CASA? NHB funding is cheaper than your normal borrowing. Any cheap funding is good for HFC’s.

@PP1 : Overall I think you are emphasizing too much on just one point. affordable housing being operated as subsidiaries. I don’t think thats negative point at all. Just a business decision. If you have any other negative points, please share.

PP1,

We as moderators appreciate your inputs on the gruh thread. But there is a thin line seperating a rebuttal to someone’ point of view and outright inflammatory remarks. You are requested to tone down your comments to unoffensive levels and make sure there are not too many repetitions.

People who have a high allocation to HFCs will have their own logic and have invested their own hard owned money and most likely are highly competent people who know what it takes how to invest. You can at best put forth the negatives and then let them decide on the merits/demerits of the investment thesis.

And the point about subsidiary is being dragged ad nauseum. kindly let it rest.

regards

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Peace ! I think (in my small mind and small brain ) risk to gruh is a repeat of 2006(icici launched teaser loans at 6% and sbi later at 8%) - gruh did not respond on price but reduced it loan book growth % . Why would not banks enter the self employed low ticket space perhaps create focussed teams to do this is a question .Risk of money becoming a commodity in new modi’s world where everyone will have a bank a/c and banks will manage to give loans to those without income proof mainly individuals since collateral is safe.Gruh will still grow but can it still get 13 times book in this new brave world is the question.

Thanks Hitesh… just to add…if anyone wants to highlight the risks, negatives or positives of a stock or an industry, please do so. What is NOT acceptable is asking leading questions which have a particular slant. If you have a point to make, make it.

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I’m invested in Gruh and views are positively biased on the HFC sector. But I can’t get my mind around it’s valuation of 13x P/B no matter what growth %, NIM, Asset Quality, ROA, etc. numbers you throw at me.

Tried to do a quick valuation analysis of some of the best performing HFCs currently:-

Does the BV/EPS multiple have anything to do with Gruh’s exalted valuations?

I think high p/b is due to 3 things - its consistently high ROE (30% ) and 25%-28% loan book and no net npas.I think the loan book growth might be under threat if a)banks focus on gruh’s segment with lower rates ( this will take time though market will discount this earlier )-I think this will happen and is inevitable but the market size is huge - I also foresee borrowers getting impatient for lower rates since information gets passed on who is charging how much - on npas co is spot clean but recent court case on high ticket LAP to royal raises some concerns as to why lend on LAP segment at such high ticket size .

I will be comfortable at a P/B of around 7-8 on the higher end for gruh.

I believe Repco’s numbers for ROE, Loan Book Growth and NPAs are very close if not as good as Gruh. (If you want, I’ll share the numbers as well) So it, doesn’t justify the 2x difference in P/B.

Agree on banks focusing on the HFCs segments in the future, and a comfortable P/B of 7/8 for Gruh.

Don’t agree on borrowers getting impatient for lower rates. Half the book is self-employed segment where they don’t have much bargaining power due to lack of other alternatives apart from Gruh, Repco, etc.

  1. If we are looking specifically at book value to value Gruh, should we not be cognisant of the fact Gruh pays around 30% of its profits as dividend and so the book value is understated by that extent? Also, this is also a reason that RoE remains high. Managing this consistently for long term is a feat.

  2. Personally, I will always pay premium to Gruh when compared to its peers as long as the current metrics remain. By how much is the point of contention. When we look at P/E in the above table, it is 20% premium over Repco and it’s double when we look at P/B. There is no correct metric here I think but I will go with P/E because of RoE.

  3. Gruh will grow at 25% for the next 5-7 years and the probability and predictability of this is very very high. The management itself said this during an interview in money control about 3-4 months back. In fact when asked, by how much would you grow this FY, Sudhin Choksey told, I’m not sure as economy is still recovering but over the next 5-7 he said he is confident of growing at 25% minimum (Yes, he said this) and more if economy prospers.

  4. Market opportunity being so huge, the financial metrics will stay inflated for all the companies in this sector and more so for the LEADER.

Adding this point: Gruh comes with extreme downside protection (220-240 is a wall). If at all, it will only be time wise correction. So, you can put large amounts of capital with downside protection, assured 15% CAGR until valuations vs. Price catch up happens and if market takes fancy, make the usual 30% CAGR. I think Gruh may be the one of very few companies with this in place.

I hold Gruh.

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@richdreamz

Very much agree with you on first point.

Moreover Gruh finance being the company promoted by HDFC has an access to low cost of funding ( thanking due to higher rating by the rating agency ). Gruh finance has long track record of weathering all kinds of economic situation compared to repco home finance ( i don’t doubt repco on that ).

Gruh finance average ticket size is of 6 - 8 lacs which I think no big home finance companies would be interested in because that would be from non salaried people and unorganized sector which is very difficult and requires lots of energy and expertise for credit evaluation.

Gruh finance has in house credentials of 35 check points for evaluation of a loan applicant and based on that merit the interest rate of the loan is derived. So interest rate depends on case to case basis.

No high level official can do bias on the interest rate accreditation system.

That’s the reason Gruh finance is able to maintain the above average performance and enjoys the premium in the market.

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Chirag - How do you know this? Can you share more details on this? Assuming this is their credit appraisal process, which executed over a number of years certainly builds a strong moat which cannot be replicated easily by any new HFC.

Good points …I agree due to dividend we must value gruh on pe basis . If it grows 25% i think PE of 25 is ok - which means on expected eps of about 7 for fy ended 31.03.2016 we get abount 175 levels.Post this time correction can happen and then should start discounting eps for the next year .

Now if we look at gruh on book basis at 8 p/b we get about 160 .

So 160-175 can be strong floor . If this does not happen then either time correction or strong break out about 320 to signal that something good is happening in this co which we do not fathom.

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In an era before most Indians had even heard about ‘credit score’, GRUH came up with its own assessment system. Today, once a borrower’s income details have been verified, all data is put in a software that looks at 23 parameters to determine eligibility. It’s a home-grown system that has been refined over the years, according to Suresh Iyer, general manager, operations at GRUH.

Read more: http://forbesindia.com/article/work-in-progress/building-homes-the-gruh-finance-way/34819/0

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@gurjota

Hope the above link sent by Neerav helps you for your evaluation.

I think this is indeed a very good moat and pedigree that management has developed that would be very difficult for new players and replicate the same.

If they want to grow business than there is definitely risk of rising NPA’s and their is were Gruh finance scores.