@bbarhate : I can answer why Repco is not taking up leverage question.
In fact Repco is increasing leverage but slowly. It doesn’t happen that Repco disburses 2-3,000 cr of loans in a year just because it can. Management has said in past that they are comfortable with growing at 25% in current environment. If economy picks up they’ll like to grow at 35% but would not compromise on quality of loans or cost of operations.
All said and done, Repco will not leverage as much as Gruh. Credit rating agencies look at leverage when they give you a rating. A discussion with one of my friend working in a rating agency revealed that many times when NBFC approaches rating agency, the analysts ask them to get to a certain level of leverage by raising equity if the higher rating is to be given.
Hi @nikrod12 , thanks for replying.
My doubt is why repco should be worried when Gruh can generate safer loans ( Low NPA and thus higher asset quality) with taking higher leverage and generate higher ROE and still grow at around 25%. (May be because of their relying more on salaried customers)
I have tried to check leverage trend for gruh and repco. Gruh has maintained its leverage at average of 10 for past 10 years with 7 out of last 10 years showing leverage above 9. Also for all other companies in the same sector current leverage is high compared to Repco.
DHFL - 10.54
GIC Housing - 8.77
Canfin- 9.56
May be as you said they might be increasing their equity base before their rating exercise. But then it does not happen that Repco reduces its leverage before rating exercise and then take additional debt. recent rating results came at around end of Sept last month by CARE. Before that rating was upgraded in Sept 2013 by ICRA.
IPO in Mar, 2013 was planned to give exit to PE player Carlyle rather than increasing equity base( My assumption). After Mar, 2013 there has not been any incidence of raising equity. So may be leverage will increase further along with ROE in coming years. From 2013 to 2015 leverage has come up from 4.83 to 6.29. Is it right to think this way?
in these matters it is best to defer to the wisdom of management.
there is significant material difference between Gruh and Repco. While the
former concentrates on Mumbai and Gujarat, the fastest growing markets in
the country, the latter has its base in Tamil Nadu.
Also Repco, more than Gruh, concentrates on small ticket loans catering to
self employed people. For this class of people income is lumpy and so are
payments made by them. Naturally NPAs too tend fluctuate though it evens
out over the long term.
The positive thing about Repco is the slightly higher rate of interest it
charges borrowers since it has some kind of a monopoly in its market.
I presume once the economy begins booming, Repco will become aggressive in
lending and thus increase leverage for this purpose.
disclosure: holding Repco in core portfolio and hence my views may be
considered biased.
i saw the discussions regarding NIM and leverage today. Even I was confused regarding NIM as % of advances being 18/500 and for the second case it will be 22/500 right? the denominator being 500 i.e loan assets. Thanks for the example sir
Hi, amateur question to regular posters. In lending business, what would be the definition of leverage. Will it be loan assets/ equity or borrowed funds/equity. I think it would be loan assets/equity because all borrowed funds are eventually meant to be loaned out. In Screener leverage and d/e ratio is the same figure. So what is your opinion regarding leverage? I read a quote somewhere which aptly sums my query- In a lending business, the assets are the liabilities and the liabilities are assets of the lender.
PAT at Rs 39.05 cr vs Rs 32.7 cr, up 19% YoY
NII at Rs 74 cr vs Rs 59 cr, up 24.7% YoY
Prov at Rs 4.7 cr vs Rs 1.7 cr YoY
Loan book at Rs 6,849cr, up 31% YoY
Gross NPA at 1.8%
Net NPA at 0.92%
Sanctions are up 53%
Disbursements up 42% YoY
Growth and cost parameters look good but assets quality incrementally poor. This clearly shows impact of monsoon and will have to wait for Q3 to see how it is evolving.
I’m wondering if there’s a trend here for all the Financial Services companies - Axis, ICICI, Gruh, Repco all reporting worse asset quality numbers in this quarter.
Increase in NPA could be for bad monsoon and festival periods as any non payment for 90 days (I guess it is 90 days) to be marked as NPA. The NPA increases during festivals and decreases during harvest and non festival season probably by end of the year.
Disc: Invested upto 30% of the portfolio
I understand that they both lend to different sections but my question is why is Repco commanding higher valuations than Can Fin since both are growing at same pace. ROE is also 14-16% for both.
R. Varadarajan - Managing Director addressed the call:Highlights by Capital Mkt
Loan book of the bank jumped 31% to Rs 6848.8 crore at end September 2015, driven by strong 42% surge in disbursements to Rs 1356.4 crore and sanctions by 46% to Rs 1519.6 crore in Q2FY2016 over Q2FY2015.
As per the company, the loan growth was driven by all geographies. The company has expanded operations to Maharashtra and Gujarat five years back. These states contribute 7.5% of loan book, while its share in loan book is expected to further rise to 10% in few years.
The company continues to hope to maintain loans growth in strong 25-30% range.
The company has continued to diversify sources of funding, strengthening case for ratings upgrade.
Loan book mix between home loans and LAP was 80.8:19.2 at end September 2015 compared with 80.5:19.5 at end September 2014.
The customer mix between salaried and non-salaried was 42.4:57.5 at end September 2015 compared with 44.3:55.7 at end September 2014.
Average ticket size for the company increased to Rs 12.8 lakh at end September 2015 from Rs 11.6 lakh a year ago. An incremental loan ticket size was higher at Rs 16.8 lakh in Q2FY2016 with Rs 15.4 lakh for home loans and Rs 23 lakh for home equity.
The company has continued to maintain the LTV ratio at 50%.
As per the seasonal trend, GNPA ratio dipped to 2.22% at end September 2015 from 2.22% at end June 2015. NNPA ratio also declined to 0.92% at end September 2015 from 1.29% at end June 2015.The company do not have any asset quality concerns, while proposes to reduce GNPA to industry level
State wise GNPA position was Tamil Nadu 1.5%, Karnataka 1.9%, Andhra Pradesh 2.1%, Telangana 3.9%, Kerala 4.1%, Maharashtra <1% and Gujarat 1.5% at end September 2015.
Provision coverage ratio (PCR) of the company improved to 49.5% at end September 2015 from 42.4% a quarter ago. The company intends to improve PCR to 100% in next 2-3 years.
Spread stood at 2.95% and a NIM at 4.45% in Q2FY2015. Company expects to sustain target of 3% spread and NIM above 4%.
Capital adequacy ratio/CAR continues to be comfortable at 19.4% at end September 2015. The company expects CAR ratio to benefits from regulatory reduction in risk weights for housing loans in Q3FY2016.The cost-to-income ratio stood at 21.3% for Q2FY2016, including ESOP expenses and 18.5% excluding ESOP. Company expects to maintain the cost-to-income ratio at around 21% till end March 2017.The leverage ratio of the company stood at 6.6X, which company can raise to 9% with any rating impact.
Repco continues to deliver outstandingly - 31% loan growth in first half is really good. Management continues to guide 25%-30% target growth which may be easily achievable in coming years also considering the Housing for all by 2022 scheme should gather momentum in coming years. From management talks there continues to be no concerns about Asset quality and they say this is annual seasonal effect and they are confident of recovering all the loans marked as NPAs (after 90 day period). Their LTV is around 50% which provides lot of comfort. So, all seems good and good ( HIGH multiple years growth with High Level of Certainty with high NIMs and also negligible amount of loans going bad)…
A key credit risk I would monitor is their average ticket size. I would prefer that they continue to lend smaller amounts to larger number of customers, than larger amounts to lesser no. of customers in their quest for growth. For the segment they cater to, granularity is one major risk mitigant. I was not happy with the increase in ticket size ( had a similar observation in June quarter also). A single 20 lakh loan defaulting would mean the entire 20 lakh has to be classified as NPA. And this event is more likely than, say, 4 customers with 5 lakh loan outstanding all defaulting together (although not impossible). While one can argue that it continues to be secured by almost double (Loan to value ratio of 50%) however recovery by repossession and resale is not easy.
Otherwise, Repco has a lot of things going for it - reduction in interest rates, improvement in credit ratings, market size etc.etc.
Discl - core long term holding. no recent buy/sell.
If we see the HFC space, only HDFC, GRUH and REPCO seem that they can continue to grow at 20-25% for long time without diluting thier equity since they have high ROE.
If we look at LIC, GIC and CAN FIN HOMES they have less ROE due to lower margins and hence to keep growing at 20-25% will be a challenge and they will have to dilute equity to maintain the CAR of 12%.
So is REPCO which is trading at 4-5 X P/BV still a good buy ???
Look at the growth of CANFIN, it is expected to grow the fastest with 41% PAT growth expected over FY 15-18 (source MOSL)…they have target to reach 35k crore loan book by 2020… So no doubt repco is great and I hold it… but I would say better to diversify in two hosing finance companies(esp when options are available) than betting too much on repco,
