Some of the analysts echo Hitesh views on Gruh
Will Gruh Finance’s premium valuations sustain?
Healthy EPS CAGR of 17% over FY15-18, strong parentage and significant potential in sector should support its premium valuation
Sheetal Agarwal | Mumbai
March 21, 2016 Last Updated at 17:57 IST
Affordable housing company, Gruh Finance (Gruh)'s stock occupies the top slot in the valuation table of India’s leading banking and NBFC names. Of the 61 banking and financials’ stocks listed in the S&P BSE 500 stocks universe, Gruh trades at 7.8 times FY17 estimated book value (P/BV).
This is not only more than double that of peers such as Repco Home finance (3.3 times), Can Fin Homes (2.6 times) and Indiabulls Housing Finance (2.2 times), it is also visibly higher than the 4.7 P/BV multiple (standalone) that Gruh’s 58.6% parent, HDFC commands.
Trading at 4.4 times FY17 estimated book, Kotak Mahindra Bank figures at the number three slot in this list, followed by Bajaj Finance at 4 times FY17 estimated P/BV. The top names in this list suggest that the street is rewarding companies with healthier asset quality and high potential to grow their businesses as well as earnings.
But, Gruh has been the highest valued stock in Indian financials space for FY15 and FY16 as well. Strong earnings growth of 28% in the past three years, along with healthy return ratios has led to a sharp re-rating of the Gruh stock. Notably, its one-year forward price to book ratio has leapfrogged from 3 times in FY11 to current levels of about 8 times.
Gruh is largely focussed on the affordable housing loan segment in western India with average ticket size of its loans (the smallest among peers) at just about Rs 8 lakhs. It has a well-diversified client mix, with over 60% loans given to the employed class. The company has penetrated over 90% talukas in Maharashtra and Gujarat and is now looking to replicate this penetration in other markets as well.
The key question, however, is whether Gruh’s premium valuations are sustainable? Analysts seem to believe so. Sunesh Khanna, financials analyst at Motilal Oswal Securities says, “We expect Gruh Finance to continue to trade at premium multiples due to track record of financial/operating performance, immense potential of scalability due to massive opportunity in the affordable housing segment, strong parentage of HDFC, best-in-class return ratios, efficient use of capital (no dilution in the last 10 years) and healthy asset quality.”
Bunty Chawal, analyst at Axis Direct, too, echoes this view. “Due to consistent growth prospects, higher return on asset / equity, healthy margins and well managed asset quality, we believe that the stock would continue to trade at a premium multiple,” he wrote in a recent note on the company.
Given the smaller base and the huge growth potential, it is not surprising that most analysts expect the company’s loan book to grow at a healthy clip of 25% over the next two-three years. While one may contest this looking at the dismal growth in the unsold inventories in the larger housing space, which has forced builders/developers to go slow on new launches a fact that is partly reflecting in the numbers of building material players (plywood and sanitaryware), analysts say the affordable housing segment remains an exception. A key reason for this is the incentives in terms of tax sops, including interest rate subsidy, provided by the central government as well as significantly low penetration.
For instance, under Pradhan Mantri Awas Yojana (PMAY) - Housing for All by 2022 scheme, the government is has set a target of providing housing for all by CY2022 with an aim to construct three million houses per year over the next seven years for the urban poor. Even if half of it is achieved, it would still mean a significant jump as compared to the 0.9 million houses constructed during the 10 years of Jawaharlal Nehru National Urban Renewal Mission. Then, there are individual states that have various schemes to promote affordable housing.
In a report titled, ‘Housing finance: Small is the next big’, analysts at Antique Broking say, “Small ticket housing would be the big theme for next five years given the huge latent demand and the measures taken by the government and the Regulator to fulfil it.” Gruh Finance and Repco Home Finance, they believe, are well placed to benefit from this and continue to remain their favourite bets in the housing space.
Rising competition from existing as well as new peers, small finance bank, amongst others would be a key monitorable. While Gruh’s consistent track-record and strong parentage (which comes handy in terms of best business practices) provides some comfort on this front, analysts believe the company’s net interest margins (NIMs) could soften as it tries to compete efficiently.
Analysts on an average expect this metric to remain between 4-4.3% going forward, as compared to 4.2% currently. The other risk is if the company falters on growth expectations, which could hurt valuations significantly. For now, most analysts remain positive on Gruh and expect the stock to deliver about 17% returns from current levels.