Sunday, June 27, 2010

>Gruh Finance Ltd.: “Housing-Rural India” (LKP SHARES)

GRUH Finance Ltd. (GFL) is an NBFC providing housing finance to rural and semi urban India. Modeled to complement the business of its sponsor, HDFC, GFL operates in states and regions offering high growth potential. The strong rural presence combined with an improved macroeconomic environment enables asset expansion. Backed by an underleveraged balance sheet and equity support from the promoter, GFL presents a case for higher growth.

Pricing power and low competition are its key strengths: Higher operational and credit costs in rural regions have led most aggressive banks and NBFCs to focus on urban and metro regions. GFL has a strong network to service the under penetrated markets and is compensated by high asset yields. Local knowledge and experience on buyer behavior keeps npas low, translating to higher RoEs of 28% (FY10). Although we expect competition to increase over the next few years, GFL will outpace its competitors with higher profitability and lower delinquencies.

Firm growth with balance sheet liquidity - 23% loan book CAGR and 24% PAT CAGR over FY10-13. CAR of 16%, strong internal accruals and continued equity support from HDFC provides growth visibility. An underleveraged balance sheet gives comfort to expectations of scalability. As asset book expands through broadening of customer and geographic diversification, pricing power and lower operational costs (C/I ratio of ~20%) translate to greater traction in NII.

Valuation at a discount to peers: GFL trades at P/ABV of 2.3x ABV FY12 as against its historical high of 3.3x. Loan book expansion (23% CAGR asset FY010-FY13), higher profitability (RoE of 29% FY12) and proven track record to tide over adverse interest rate cycles reaffirms our belief in GFL. GFL’s business model with ROE >28% and zero net NPA should command a higher multiple and we recommend a BUY with a price target of Rs345 (3x ABV FY12).

To read the full report: GRUH FINANCE