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