ValuePickr Forum

How do I calculate the p/e ratio for Reliance Home Finance?

Well… although PE is around 32. You should be evaluating this business on Price to book and future potential of business.

The company have Asset under management of approx 15000 cr and they are looking to take it to 50000 cr in next 3-4 years. If the planning goes right it could turn out to be 3x from current prices.

Is there any notification for price consideration of individual demerged entities? this is essential for considering our purchase cost to derive from premerger procurement price.

At PE of 24, P/B of 2.1, comparable size to Canfin Homes in terms of loan book size, superior last 3 years growth rate (tripling of sales and profit), guidance of 3 times growth over the next 3 to 5 years, superior NPM comparable only to Indiabulls Housing Finance, excellent health of books with GNPA of 0.89, excellent parent in Reliance Capital to enable loan at cheaper rates, I wonder why this stock is not quoting at twice it’s current MP of Rs87.

Besides the riskier asset make up of LAP and Construcion finance making up 50% of the portfolio size, I do not see any other issues. This company is in to affordable housing as well. I find this to be an excellent opportunity to play affordable housing theme at excellent price point (with blue chip pedigree considering this is a subsidiary of Reliance Capital).

Your thoughts?

Disclosure: Entered today (10% of portfolio). High conviction to add more.

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My high conviction has turned in to low conviction as the PAT is apparently after a tax benefit of Rs35cr. No movement in PBT between 2016 and 2017 even as sales increased 40%.

Recent quarter June PBT is Rs45crs. Considering 30 percent Tax rate and annualized PAT of Rs120Cr for FY17, this is available at a PE of 33. More quality stocks are available cheaper.

The latest results say the half-year earnings per share is 3.61 rupees (not annualized): https://www.reliancehomefinance.com/documents/1330607/3237815/Quarter+and+Half+year+results+September+2017.pdf/e217dac8-ec4a-46ca-9e76-2ad84df18781

PE works out be close to 12 if I assume annual EPS of 7.22 (3.61 x 2). Looks too good to be true. What am I missing?

The Q2 FY18 earnings per share figure of 1.59 rupees (on a net profit of 41 crore rupees) makes sense only if the total number of shares is around 25 crore. That’s approximately the number of shares issued to Reliance Capital shareholders during the demerger: “the Company has issued and allotted 25,26,89,630 to the shareholders of RCap in the ratio of 1:1 on September 7, 2017” (check out the previous link)

Looking forward to what others think.

Ok, seems like the actual number of outstanding shares is close to 50 crore: http://www.bseindia.com/corporates/shpSecurities.aspx?scripcd=540709&qtrid=95.00

So the earnings per share figure given in the financials is terribly misleading.

Gives a hint about the management with their misleading EPS figures!

As reported by @prash.peru, 41 crore income to 48 crore - EPS comes to approx 0.84. If we take half yearly yearnings into account its 78 crores income to 48 crore which comes to approx 1.60 . Am i missing something in EPS calculation? If not the stock is really attractive

Read the posts on this thread:

I was learning how to evaluate NBFC companies and I realized that p/e ratio is not very useful. The p/b ratio is more important.

Disc: Invested

Market cap is 4200crs. Using the half yearly profit of Rs78cr gives an annualized PE of 26. This is more than CanFin, IBHFL and DHFL.

Could you tell us why it is book value, rather than earnings, that matters when it comes to NBFCs? A line or two that summarise your thinking on the matter would be great. Book value, to me, matters only when it comes to businesses that face the imminent prospect of liquidation.

Note: “Book value is not key to valuing banks,” said Warren Buffett

NBFC is “Non-Banking Financial Company”

I didn’t say earnings is not important. I said p/e is not as important as p/b for valuation of a NBFC.

NBFCs make almost all its earnings from the loans it disburses unlike banks. So the price you are paying for the stock is an approximate multiple of its loan book size. Most of the book value of a NBFC is its loan book size. You also need to check the npa rate so that the loan book is healthy and there are not many defaults.

If you compare RHFL to its peers like Can Fin Homes, you will notice it is trading at a higher price to book ratio. The npa rate is also very low for RHFL but its trading at a much lower price, I assume because of distrust of promoters.

Disc: Invested

I guess when Buffett mentions banks, he refers to all financial intermediaries. So his statement applies quite well to NBFCs as well. Secondly, the price you pay for any investment should be for the future cash flow that it can offer you, not what it has earned in the past (which is roughly what the book value tells you). So unless you’re talking about an NBFC that is going to be liquidated soon, and the cash proceeds handed over to you (the shareholder), it makes better sense to think of any NBFC as an ongoing concern and focus on its earnings. NPAs, loan book size and the other things you mention matter, but only because they influence future earnings.

I’m not sure if that’s right. Book value has nothing to do with loan-book size.

What are the all the sources of revenue of a bank and what are all the sources of revenue for a Home Finance company?

I don’t understand what you’re getting at, but even if banks earn their revenues just the way NBFCs do, book value won’t matter unless you’re talking about a business that is on the road to liquidation.

I am a little confused by what I have read so far about valuating nbfcs. I will find out properly if I am right or wrong :p.

I believe P/B is a more better metric for valuing Banks and NBFCs.

Basically banks and NBFCs borrow money at cheaper rates and lend it at higher rates. Its a simple business. The loan book i.e. AUM is built by borrowings and owners equity. The borrowings are generally around 7-10 times of equity for a Bank/NBFC. The owners equity represents the book value. Therefore with the book value, we can have a ball-park of the AUM size of the company. With the AUM comes the ROA which will lead us to the profitability of the bank. All banks and NBFCs will have a similar leverage and similar range for cost of debt. Therefore with the book value we can get to profitability of a player on a ball park basis. Obviously it will differ for different types of lenders but it gives a good idea.
The price to book multiple will vary depending on the loan book quality, NIMs, cost to income ratio etc.

So price book is not the only measure to track but yes its a very good measure to track for lenders.

Price equity doesn’t take into consideration the AUM size, the leverage lender could have, the quality of the book etc. Its more straightforward metric though to give a better idea of quality of lender one has to and has to look at the Balance Sheet and hence price book is a much better metric though thats not the only metric one can rely for investment decisions.