Why do ppl. think Repco better than DHFL ?? looking for views
@Navtej: few points that I can think of for Repco
1). Better promoters
2). Expertise in low ticket mortgages where DHFL and others don’t compete.
3). Less competition than crowded high ticket mortgage market where banks and HFC’s compete with no leverage on interest rates
4). Huge opportunity size
5). Repco is well capitalized as of now and can grow easily
6). Good ROA, NIM and ROE. Better than industry and next only to Gruh
7). Relatively small size hence possibility of growing at high rate for long time
Kupu contentarea
I dont agree on following points
1). Better promoters
2). Expertise in low ticket mortgages where DHFL and others don’t compete.
3). Less competition than crowded high ticket mortgage market where banks and HFC’s compete with no leverage on interest rates
Promoter passed the test in 2012 when they were blamed with a construction company(i think it was unitech). DHFL’s main strenght is low ticket size >15lk . For high ticket loan they have first blue.
4). Huge opportunity size
5). Repco is well capitalized as of now and can grow easily
That should be for All the HFC’s as they meet the criteria well
6.Good ROA, NIM and ROE. Better than industry and next only to Gruh.
True, But we need to discount DHFL acquiring First Blue (it will come with its own set of problem). Hopefully the lag should be fine with next quaters (hopefully).
7.Network size is more of an advantage in HFc i guess…
But i get the point Repco with better NIM, ROE get an expensive valuation hopefully when DHFL improves (if they Do) they should command a better premium .
Valuation of mostly lending banks and NBFCs depends to a large extent on the confidence investors have on their loan book as this is a black box where we depend on the integrity of the managers/promoters to duly declare NPAs and provision adequately. Scope for profit manipulation is immense.
This is the reason many Chinese banks trade at PEs of around 5X and below book value, The market simply does not believe their published loan default numbers.
DHFL needs to walk the talk with consistent numbers before they get rerated. Repco too needs to show good prudent growth if it hopes to ever attain Gruh type valuations.
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@Navtej: Market has it’s own mind on valuations. I cannot fathom the reason Gruh trades at 12 PB. Same way you cannot see why DHFL trades at 1.3/1.4 PB. Market may have it’s reasons.
I think it depends on ownership bias as well. I own Repco and hence think highly of it. Some investors owning Indiabulld HFC are at loss why it shouldn’t trade at higher multiples. But overall in my short 4 years of experience with Banks and NBFC’s, I have observed that market pays heftily for quality of financial stocks and suspect companies trade cheap for very long time.
Kupu contentarea
@nikhil: You are right but what a find strange is why ppl. buy gruh at 12 PB … i guess more like a carrot story rite stock but wrong price…
hi[ Comment too short ]
Hi,Gruh is paying out dividends to the tune of more than 35% of profits. To that extend isn’t the book value understated? The business is in a sweet spot - no need to dilute equity and still can grow with high dividend payout.
DHFL just cannot be compared. They will never reach Gruh’s level of profitability as their yields and cost of funds may never match-up. ROA might improve if the cost of operations reduce (currently cost to income ratio is also high at 28% compared to 18% for Gruh).
Its better to compare DHFL with LIC, Canfin and GIC.
But the discount is steep as the market is not convinced about the promoters…this could change, but who knows when?
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Vinod MS: Nice points on DHFL. I din’t know enough of it to comment.
For Gruh I agree with everything about business being great. But I truly suspect long term returns of someone who buys at 12 PB. We should also look at PE of Gruh. But even there it’s almost 40X trailing. I don’t see it trading at 12 PB forever. If quality sustains for long time, 5-7 PB is fine. So long term investors who buy and hold will make very average return of 15-18% from CMP. For earlier investors, it’s great to hold on.
What do you think?
Kupu contentarea
@Nikhil, when the economy turns around Gruh can grow north of 30%. Two years down the line if they decide to dilute at 12 P/B there will be great upward revision in book. Scope of opportunity is huge and of long term. Considering this it’s a hold and 25% compounding can not be ruled out.
PS: I sold out some time back thinking it’s costly and since then it has run up 30%+.
Nikhil, I am not saying Gruh is a buy…frankly I always thought its over-valued but the market thinks otherwise. I would say I was wrong especially when there were opportunities in between when the valuation was much lower than what it is today. Gruh might most likely continue to be a compounding machine even at current price. For folks happy with compounding returns at 15-20% it might still be a strong buy. Keep it in the radar and get in when there is some temporary negativity or a big crash in overall markets, you might get it at your 7 P/B levels.
Its similar to Page… most folks look at 40 P/E and give it a miss. As is the case with Page market is pricing it for the high growth possible…for next 10 years probably. And its kind of predictable too. Page gave good opportunity to enter at 5600 levels and then again when it corrected to 6000 when it was discounting at 30-33 time FY16 earnings.
Gruh’s/Repco’s opportunity size - read somewhere that of the earning population only 15% are salaried. HDFC has a loan book in excess of 2 lac Cr tapping this segment. SBI Home finance also has similar size tapping only this 15%. Around 50% of the balance are self employed (balance casual laborers). The loan ticket size might be low here and currently many of them might not qualify, but the opportunity is still big. Gruh’s and Recpo’s loan books at way less than 10000 Cr is quite small. And remember they do not have competition from the banks unlike LIC/Canfin/HDFC.
With Tier-2/3 cities growing faster than the country average we might be looking at attractive lending business by NBFCs like Gruh/Repco/SCUF tapping the bottom of the pyramid. SCUF has quietly almost doubled from 900 levels a few months back to touch 1700. We may end-up being wrong to assign P/B targets to these businesses. Like “price anchoring” we might fall pray to “Valuation anchoring” 
Consistent high quality earnings with great visibility and strong moat might get rewarded handsomely.
Only the regulator can damage this story.
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@vinod i agree on DHFL NIM margin are not very healthy specially compared to gruh.
@raj even if gruh dilutes at 12 p/bv doesnt mean we buy at those prices. ( selling out is more when story is over not when prices are expensive)… Diluting also means direct impact on EPS. and company which dilutes regularly will have a long term impact …
From a technical point of view, Repco is at its 50 day EMA and might be good to accumulate below 435-440. CCI is at -191, WIlliam %R is at -93 and price is at lower end of the bollinger bands.
Disc: Invested and accumulating in above range.
@Vinod: Agree with all your points. Opportunity size for Gruh/Repco is simply huge. I remember even in 2011, when we were discussing Gruh on TED, everyone agreed on possibility of 50-60,000 Mcap in 10-15 years. It’s that kind of predictable business.
@Navtej: For Banks and NBFC’s diluting is good for shareholders if it happens at more than book value. Higher the PB, better the deal for shareholdres. NBFC’s that want to grow at 25-35% have to dilute frequently since that kind of growth is not possible organically. The equity dilution adds a lot to book value and EPS growth returns back to normal after few quarters. Let me know if you want few examples on how this works. We have plenty of examples with HDFC Bank, IndusInd Bank diluting equity and benefiting shareholders.
Kupu contentarea
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@nikhil this is what i said diluting at 12 p/bv will have a long term impact(good way). therefore selling out when company story is intact and not when they have gotten expensive… this in answer to @raj selling out early because he thought it was expensive…
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Amazing clarity of thoughts Dear Vinod.
It’s a pleasure to go through posts. Please post more often.
Vinod,
Repco and Gruh with their focus on the non salaried class indeed seem to be in a sweet spot today, however we should not forget that they are in effect lending to India’s version of subprime borrowers hence their high NIMs.
If a recession similar to the Asian crisis hits India at some point then the Dhobis and the Halwaiis that these banks lend to will likely go bust and default. Salaried people will be hit too but they can get other jobs at some point and many of them also have savings thus risk levels are much lower compared to the self employed class.
The other major risk (which you alluded to) is regulation coupled with low barriers to entry. The sector given it’s attractive economics will likely attract new entrants which will in turn attract more government scrutiny on the profitability levels of the industry. This can have severe consequences for the sector.
In spite of above I hold both Gruh and Repco but do realize the investments are negatively skewed with good chance of a favorable run but high tail risks as well.
Bobby
ricky76,
In the foreseeable future (at least 3-4 years) I don’t see any “subprime crisis” in India. The reason is that in US the LTV was close to 100%, whereas RHFL has average LTV of 65% (someone posted that less than 14% of loans had LTV > 80%). In addition to the “V” in LTV, one should consider the others costs like taxes, cash payments to builder, and most importantly the propensity of Indians to save. If anything there might be a “HNIprime crisis”. Indians are becoming addicted to debt, but are a long way away from US citizens. Also the RBI is infinitely more watchful than the FED.
The average loan size is small which is good. And investors keep track of NPAs in quarterly results, if they see a trend of increasing NPAs, they can always sell the shares.
Also, Repco has high CAR of 24.5%, so high NIM is anyways expected.