Canfin has been growing superbly, need to study more on it. Do you know why its NIM , ROA is lower at 3%, 1.2% compared to Repco at 4.4%, 2.3% respectively? Is it because Repco lends to non-salaried segment which is at higher rates?
Canfin mostly lends to salaried class and even in non salaried class it lends to what people would call safe clientele. But bcos of that the margins are less than Repco. Whereas Repco lends to non salaried class and is able to charge higher rates and hence has higher NIMs.
And in a query to why Repco commands higher valuations its mainly to do with higher ROA as compared to other players like Canfin and GIC etc. Only GRUH comes close to it in terms of ratios.
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I agree that REPCO has better ROA and ROE will improve going forward. Going forward REPCO will also be able to grow at 20-25% for long time.
But is 4.5-5 X P/BV justified to make a fresh purchase ??
Is it reasonably priced ??
There is no clear answer to that, it is expensive but has growth visibility for next 10 years and all HFCs are valued relative to each other⌠It is expensive but can still continue to grow and remain expensive. If any external debacle doesnt happen, it has power to double every three years.
So you have to bite the bullet in hope that growth would continue, growth is the margin of safety in such stocks.
@RamanTiwari: Repco is one of my largest holding. Still I would like to disagree with couple of points.
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Growth visibility for 10 years - HFC space is now super competitive with 60-70 HFCâs. Every NBFC is now into mortgage lending. So consistently growing at 25% for 10 years is difficult task. 15-18% over that period is reasonable.
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Price doubling every 3 years from this point looks almost impossible. Itâs not every day that an HFC is valued at 30-40 PE. This is bull market and we should not forget that valuations are much higher than they normally should.
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Nikhil, getting into a business is easy but maintaining profitability, growth may not be easy. I wld like to draw your attention to the rush into airline business in mid 90âs, rush into software in late 90âs. Similarly rush into the auto sector in the US in the begining of the 20th century. So 60-70 more HFCâs, but how many wld remain, time will tell. Secondly the story sld be more than a 10 yr story because urban housing shortage is approx 20 mill and about 8 lacs or so new units are added p.a. And according to estimates about 30 cr pepole expected to move to citites by 2030 ( source: nhb.org.in/publications). The 8 lac figure is frm elsewhere, forgetting the source. Rural housing shortage is even more.
Regards
Discl: invested
I am not doubting potential of HFCâs. Just being cautious about rosy picture we all build and assume things would continue for 10-20 years at same pace.
Sriram, Sundaram, Chola and Bajaj all have substantial portfolio in housing now. These are not players we can ignore. I remember back in 2006-7, investors on TED were saying HDFC is 25% grower for 10 years. We all know that growth rate did not continue. HDFC is doing 12% growth for past 2-3 years. 10 years is very long period to predict even if macroâs and big picture is favorable right now. We should assume things for 2-3 years and keep checking the story.
Lastly if real estate slowdown continues, many HFCâs and NBFC/Banks will have have LAP portfolio defaults. In that case even if Gruh/Repco are not affected as much, entire sector will be de-rated. When a stock gets 20 PE from earlier 40, it wipes out 2-3 years of investor gain. Thatâs what I would be worried about in near future.
Disc - Repco is more than 10% of my portfolio.
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- If you listen to Repcoâs management they see ample growth, so till
the time you see this 25-30% growth entry of all other HFCs is not a
concern - Also, you need to factor in the fact that, Repco is very
less leveraged, with higher leverage in future ROEs would increase,
MOSL report on this says ROE would improve to 24% by FY20 - Also, in 10lac segments they are still primary in Tamil Nadu⌠whole country
represents growth opportunities - Non- salaried is also a growth niche, not easy to penetrate
I dont see why it wonât double in 3 years unless a global meltdown happens.
5 yrs is a good time to make enough from this and exit. Example of HDFC bank growing at 12% is not correct since the whole banking credit is not growing well and the bank has clearly articulated that they would grow at market growth + few%. It is very much possible that HDFC bank could start growing at 20%+ when economy recovers fully.
Repco is in a sweet spot because it is ready to capture market with adequate organisation/culture, experience and capital. It doesnât need to grab market share from others. It can only pick and choose clients to grow for the next few yrs.
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@Sumit: HDFC the hosing finance company is growing at 10-12% these days. HDFC Bank is doing fine all along with 20-25% loan growth. HDFC represents entire housing finance market as itâs industry leader there.
Just to avoid confusion, HDFC and HDFC Bank are separate companies.
Doubling the net profit and doubling the price are totally different things. Repco would surely double PAT in 3 years. Or maybe even better. But will a mortgage finance NBFC command 35 PE forever? We need to check history for this. In 2006-07 banks like Axis and HDFC Bank were growing at 40%. Mortgage lender HDFC was growing at 35%. They all used to command PEâs of 35-45. Did those PEâs sustain?
NBFCâs or any bank for that matter will not trade at more than 25 PE forever, irrespective of quality. Even best of the best HDFC Bank has been derated on PE front in past few years. Do we really believe Gruh and Repco will sustain 45 and 35 PE?
I am confident that both Gruh and Repco will grow at 25% for at least 4-5 years. Price growing at 25%? Not going to happen. Thatâs only point I would like to put forward. But as usual different opinions make market.
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u might be missing a point , market cap anad size of the market
Valuations are better left to Mr. Market.
From grwoth perspective, the way Repco has grown in the first six months this year(at 31% loan book growth), it should be easily able to grow even better going forward with more favorable conditions coming in. Real estate prices are not growing, interest rates are expected to soften further , government should continue to drive the low cost affordable housing sector with more and more incentives(just like the recent FDI move), the competition in the non-salaried segment is still not there which is Repco moat. All this makes for a sweet spot for Repco as a business and with market cap at just 4000cr - it makes a even sweeter spot for Repco stock !
Disclosure: Its my biggest holding in my PF.
A thought on why mortgage would be /can be a game changer for many cos.
The valuation metric you are using is wrong.
Banks and NBFCs are normally valued on P/BV basis apart from other comparisons on the basis of ROA, ROE, NIMs, Capital Base, Operation costs as a portion of net revenues etc.,.
You can find lot of stuff on google on why P/BV is a better way to value NBFCs and Banks.
Regards.
@hrfacebuk: Siji I am very well aware of PB and PE valuations for NBFCâs.
Did you know that Gruh is one of the most expensive financial stock in world at 12+ P/BV? Repco is at 5/6 P/BV which is extremely expensive if you take PBV as sole valuation. For years investors tried valuing Gruh on PBV and shrugged it off as super expensive. Then we came to terms with it and realized that PE fits better in Gruhâs case.
Another angle is when a financial raises equity capital every few years, it renders PBV useless. For an example, IndusInd Bank was trading at PBV of 4.25 this July. They raised 5000 Cr of equity and suddenly PBV ratio dropped to 3.25. Would you then say stock was expensive at one instance and is reasonable in couple of days?
Believe it or not, most of the investors are using PE for NBFC valuation these days. And after all ROE = PB / PE. So PE is nothing but function of PB and ROE.
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As Gruh is not raising fresh capital for years and its gives out good dividend its P/BV ratio is very very high.
Valuing Repco on book basis say at 2.5 times book would mean a price of ~300 rs. That would mean a PE of 11-12( FY16 basis) and PE of 8-9(on FY17 basis) which would be absurd( for a business growing at and expected to grow at ~30% going forward and not only this âŚwith lot of relative certainty and safety).
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I had read smbdy saying this before as well on the forum (i.e. valuing on pe basis).
I thought then, that would try to find and read about this thought process on google, but havenât been able to do so as yet.
I am not saying that P/BV shud be used in isolation but shud be used in the light of other factors stated. I am able to reconcile with why P/BV is or shud be used. Could you please guide me to some references about this on the net (use of PE) if you have come across any good reads on this. I would like to understand more as to why PE should be used and the differences there off.
Thanks.
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Hi @hrfacebuk: I do not have specific references. But if you can go through old threads of HDFC Bank, Gruh on The Equity Desk, it would clear the point.
Also please read entire threads of Gruh and Repco on ValuePickr. We have discussed this a lot of times.
@bharti_vishal has covered what would happen if Repco were to get usual 2-3 PB in his comment above. I think that explains it well.
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