Repco Home Finance IPO Review..!

by Angel Broking...!

Operates in attractive..

loan segment - Priority sector home loans:

Repco Home Finance Ltd –RHFL - is largely focused on providing home loans in tier-II and tier-III cities (with a sub- Rs. 10 lakh

average loan ticket size that is Rs. 9.2 lakh ), due to which a large part of its book qualifies as priority

sector lending (PSL) for banks.

REPCO_HOME Finance IPO Press meet

In Angel Broking view, NBFCs operating in PSL segments

enjoy competitive advantages, as most banks (especially in the private sector)

have a perennial shortage in meeting their PSL targets, creating favorable

demand-supply dynamics for those NBFCs that can source higher-yielding PSL

loans at reasonable asset quality.

REPCO’s loan book profile also allows it to procure 44 per cent of its total borrowing via

low-cost NHB (National Housing bank) refinance averaging nearly 7.5 to 8 per cent (NHB refinance is available under various schemes, primarily for rural loans upto Rs. 15lakh and also for low

cost urban housing loans up to Rs. 10lakhs).

Moreover, the funding that it gets from banks in turn largely qualifies as PSL for the banks (loans by banks to NBFCs, which are on-lent as home loans less than Rs. 10lakhs qualify as PSL). This makes it

attractive for banks to lend to RHFL at a reasonable cost (about 1% above

base rate), as against alternatives such as parking funds under RIDF at extremely

low yields, to meet their PSL targets.

Relatively low-cost NHB and bank funding enables it to maintain healthy margins and return ratios (NIMs at 3.8 % and RoE at 22.2 % in 1HFY2013, calculated on an annualized basis)

In terms of borrower profile, about 53 % of RHFL’s outstanding loan book

constituted loans to relatively higher-yielding higher-risk non-salaried segment. To

mitigate risks, the company, lends at a low LTV of about 65 %, as per the

management.

In terms of geographical presence, 67 % and 98 % of its business is

concentrated in Tamil Nadu and South India, respectively, largely in tier-II and

tier-III cities.

Management expects strong growth to continue:

Over FY2008-12, the company grew its loan book at a CAGR of 43.8 % (albeit on a small base) to Rs.2,802 cr, driving PAT (Profit After Tax - Net Profit) CAGR of 43.3 %.

As of September 30, 2012, its CRAR stood at a comfortable 15.9 % (entirely tier-I). Further, IPO proceeds would increase its capital base by nearly 0.9 x, providing enough headroom for maintaining strong loan growth for the next few years as well.

Funding mix is also expected to remain stable (In FY 2014 NHB refinance facility for Rural housing fund increased by 50 % to Rs. 6,000 cr; bank demand for PSL opportunities is also expected to remain strong and future outlook is favorable, in our view, given government’s priority sector

focus).

Outlook and Valuation..!

RHFL generated 22.2 % RoE in 1HFY2013E and would trade

at 1.8x FY 2013E ABV (at the upper end of its price band, based on post-issue

networth).

Closest comparable peer - Gruh HF (mainly western India, rural and

semi-urban focus, largely PSL qualifying home loans) appears extremely

expensive at valuations of 7.3x FY 2013E BV, notwithstanding its 30 % earnings

growth trajectory and 35 % ROEs (FY 2013E).

Other NBFCs like Mahindra Finance and Shriram Transport Finance operating in different priority sector

segments to a varying degree and generating similar return ratios, are trading at

2.6 x and 2.3 x FY 2013E ABV, respectively (but they have larger, relatively more