REPCO HOUSING FINANCE: Management meet takeaways; margins to remain stable/increase; asset quality to improve
(REPCO IN, Mkt Cap USD0.23b, CMP INR200, Not Rated)
MotilalOswalmet Repco Home Financeâs Executive Director, Mr. V Raghu to understand Repcoâs growth strategy, business outlook, competitive scenario and vision. Key takeaways:
)- Housing finance market continues to remain buoyant especially underpenetrated self employed segment, and by increasing its reach expects a healthy 35%-40% loan growth for next 2 years.
)- Likely Ratings upgrade: RHFL has approached rating agencies for a rating upgrade, currently it commands A+ rating, however its rating is lower than its peer due to high leverage. Post recent capital raising of Rs2.6bn, CAR stands at 25% coupled with strong p
Expects to maintain margins above 4% and spreads over 3%, RHFL will also increase proportion of LAP to 20% (from existing 15%) of loan book that will helpRHFL to boost its overall yields.
)- Asset quality is likely to improve going forward, in line with improving situation in states of Tamil Nadu & Andhra Pradesh. Management has also made some operational changes and have strengthened the recovery process which has started yielding results and the trend is likely to continue.
Housing finance market continues to remain buoyant expect healthy 35%-40% loan growth for next 2 years
Repco has delivered a loan book CAGR of over 40% between FY08-FY13. Management believes that the housing market continues to remain buoyant; especially the underpenetrated self employed segment which accounts for ~53% of loan book.
)- Management is confident of the strong growth prospects and expects a healthy loan growth of over 35%-40% for next two years.
)- Well capitalized for growth; Post the recent capital raising (Rs2.6b) the CAR stand at 25% (largely Tier 1) which is sufficient to take care of the growth requirements for next 2-3 years.
Likely rating upgrade: Funding cost to come down and funding base to become diversified
)- Likely Rating upgrade: RHFL has approached rating agencies for a rating upgrade, currently it commands A+ rating, however its ratings are lower compared to peers due to high leverage & privately held company status.
)- However post the recent listing,RHFL stands well capitalized with capital adequacy of 25% and leverage of ~5x, RHFL stands a strong chance of rating upgrade to AA, which would cause reduction in cost of funds, diversify the borrowing mix and enable it to tap low cost avenues like NCDs, CP etc.
)- Expects to maintain margins above 4% and spreads over 3%. RHFL will also increase proportion of LAP to 20% (from existing 15%) of loan book that will helpRHFL to boost its overall yields.
)- Recent listing has helped RHFL in attracting funds at lower interest rates. There have been instances where it has been able to get funds at 9.7% from large PSU & as well as from private banks
Asset quality likely to improve
)- Repcoâs NPL levels are higher than industry average due to its presence in self employed segment (v/s other players who are largely focused on salaried segment) as the cash flows of self employed individuals are uneven leading to volatility in the asset quality.
)- Although NPL levels are volatile, the actual loan loss toRHFL are miniscule. RHFL has written off only 0.04% (~Rs 40mn) of the cumulative disbursements made since its inception in year 2000.
)- However the asset quality outlook is likely to improve as in the recent past management has taken some corrective measures and shifted focus on containing NPL levels by making some operational changes and aligning new incentive structure which revolves around recovery.
)- NPL levels in Tamil Nadu has improved in past 6 months due to improvement in power situation, TN NPLs now accounts 0.83% of over overall NPLs of 1.48%.
)- RHFL is actively using the SARFASI window to recover loans and this has significantly boosted the recovery process, RHFL has won ~90% of cases in SARFASI.
Branch expansion: deepen presence in southern states and gradually expand in other states
)- RHFL will continue to expand the branch network as part of its strategy to expand wider and deeper, however it will be done in a staggered manner with 15-20 new branch additions every year.
)- While the business from new states will grow at a healthy pace, south states will continue to account for ~70% of business.
)- Employee addition will be in line with business growth, RHFL as a stated policy adds one employee for every Rs100mn of additional business. Management plans to increase the headcount from existing 300 to 900 over next 2-3 years.
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NHB refinance for rural housing
-RHFL has predominantly used National Housing Bank refinance (36% of total borrowings as on March 2013) to fund its disbursements, while remaining was from various SCBs and from parent, Repco Bank. Majority of RHFL as on March 2013 are in Tier II /Tier III towns and a significant portion of its portfolio qualifies as rural housing finance, and eligible for low-cost funding from NHB.
)- The cost of borrowing from NHB was about 8%, while the same from banks stood at about 11%. As RHFLâs bank funds are generally linked to the base rate any reduction in the systemic rates is likely to favorably impactRHFL cost of bank funds.
)- Although the NHB funding will reduce as proportion to overall funding, but RHFLwill continue to use NHB refinance window for the rural loans.
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**Focus on non-salaried borrower segment where competitive intensity is miniscule
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)- RHFL primarily targeting markets that are relatively underpenetrated the key target markets of company are in tier 2 and tier 3 cities and at the peripheral areas of tier 1 cities.
)- RHFL focuses on self employed segment and is not overly reliant on highly competitive salaried class. Loans to salaried and non-salaried borrowers are 47 % and 53%, outstanding loan book on FY13.
)- The non-salaried borrower segment comprising SEPs and SENPs, is under penetrated and underserved by larger HFCs and banks. RHFL has been able to successfully penetrate the non-salaried segment given its direct customer contact, tailored approach and personal evaluation processes followed during credit appraisal.
)- The competitive intensity is miniscule in this segment as most of the banks and HFCs primarily caters to salaried segment, thereby ensures strong pricing power to RHFL
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Valued at 1.4x FY15E P/B; Not Rated
RHFL has delivered loan book CAGR of over 40% between FY08 and FY13, with equally impressive earnings growth of 43% between FY08-FY13.RHFL has delivered average RoAs and RoEs of ~2.8% and ~22%, respectively over FY08-FY12. At CMP of Rs200 stock is valued at 1.45x FY15E P/B, and 10x FY15E P/E.Motilal Oswalbelieve the multiple is inexpensive given strong past track record of loan growth and earnings trajectory coupled with strong future prospects.
