Initial Coverage Equity Research Presentation

Transcription

1 Team LATINUS Initial Coverage Equity Research Presentation Sector: Housing Finance Industry: NBFC 1

2 I N D I A business cycle India is entering an early upswing phase which should increase confidence of investors. Rising GDP growth rates

3 I N D I A business cycle India is entering an early upswing phase which should increase confidence of investors. Rising GDP growth rates Low inflation 3

4 I N D I A business cycle India is entering an early upswing phase which should increase confidence of investors. Rising GDP growth rates Low inflation Low short term interest rates 4

5 I N D I A business cycle India is entering an early upswing phase which should increase confidence of investors. Rising GDP growth rates Low inflation Low short term interest rates Low bond yields 5

6 I N D I A business cycle India is entering an early upswing phase which should increase confidence of investors. Rising GDP growth rates Low inflation Low short term interest rates Low bond yields Rising stock prices 6

7 Business Description REPCO home finance is a professionally managed housing finance company headquartered in Chennai, Tamil Nadu. Product offerings - individual home loans and Loans against Property. Emerging firm with 0.6% market share in a highly fragmented housing finance industry where 65% of the share is captured by banks. It plans to become a pan India player in the future, but is planning to consolidate in existing markets in the short term RHFL was setup in 2000 as a wholly owned co-operative subsidiary of REPCO Bank. The company transformed from a closely held company to a widely held company through an IPO in Strong Presence in Southern India Shareholding pattern of RHFL Others 18% DII 16% Promoter 37% FII 29% Source: REPCO Corporate Presentation, May Source: REPCO Annual Report Generates more than 63% revenue 7

8 Industry Analysis Huge shortage of housing & favorable demographics to be key growth drivers Unmet Demand: There exists a high shortage of housing in urban as well as rural areas providing opportunities for growth for HFCs; mainly for EWS and LIG Favorable Demographics: Median age of 27 years in India depicts significant demand for housing is yet to come Housing Shortage (millions) Urban Rural Median Age (years) Source: NHB - Report on Trend and Progress of housing in India, 2014 Source: World Bank Report 8

9 Industry Analysis Rising urbanization & high population of underserved self-employed segment present significant business opportunity Rising Urbanization: As more people shift to Urban areas in future, it will spur the housing finance growth Urbanization trend (%) High % of Self Employed People Occupation of target segment 33.50% Self Employed 50.90% Salaried Casual Labour 15.60% Source: NSSO Census Data 2011 Source: NSSO Census Data

10 Industry Analysis HFCs focused largely on urban areas and high housing loan demand has left significant gaps to tap Banks largely focus on metro and Urban areas who have a higher ticket size FY % Location of target segment 26.9% 50.4% 45% 40% 35% 30% 25% 20% 15% Supply Demand Imbalance Housing loan requirement 40% 35% 25% 20% 20% 15% 30% FY % 27.80% 48.70% 10% 5% 5% 5% 5% Rural Semi Urban Urban Metropolitan 0% mn mn mn mn Demand Supply >1mn Source: NHB - Report on Trend and Source: PWC Report Progress of housing in India,

11 Competitor Analysis We selected the following competitors in the housing finance sector having similar product and firm structures. M a r k e t C a p i t a l i z a t i o n B B B B B Write Plan Link DHFL GIC Can Fin LICHF IBHL B REPCO a s o n 5 th A p r i l, : 2 9 ( B S E ) 11

12 Competitor Analysis Listed Competitors: Major sources of differentiation DHFL GIC Can Fin ATS: 1.1 million. ATS: 1.5 million ATS: 1.82 million IBHL LICHF REPCO ATS: 2.4 million ATS: 1.9 million ATS: 1.2 million 12

13 Competitor Analysis Listed Competitors: Major sources of differentiation DHFL GIC Can Fin ATS: 1.1 million. Marketing: DSA 50%, DST 42%, walk-ins 8% ATS: 1.5 million. Marketing: Mostly through DSA and tie ups with builders ATS: million Marketing: 595 active DSA IBHL LICHF REPCO ATS: 2.4 million Marketing: DSA 18%, DST 71%, walk-ins 11% ATS: 1.9 million Marketing: DSA 18%, DST 65%, walkins 5%, others 12% ATS: 1.2 million Marketing: 70% loan melas, 30% walk-ins, referrals 13

14 Competitor Analysis Listed Competitors: Major sources of differentiation DHFL GIC Can Fin ATS: 1.1 million. Marketing: DSA 50%, DST 42%, walk-ins 8% Key highlights: Planning to expand into non-salaried segment from 2015 ATS: 1.5 million Marketing: Mostly through DSA and tie ups with builders Key highlights: 99% 1 st time borrowers in the salaried segments ATS: 1.82 million Marketing: 595 active DSA Key highlights: 34% loans of disbursements to government and MNC employees IBHL LICHF REPCO ATS: 2.4 million Marketing: DSA 18%, DST 71%, walk-ins 11% Key highlights: One of the fastest growing firms in the last 5 years ATS: 1.9 million Marketing: DSA 18%, DST 65%, walkins 5%, others 12% Key Highlights: Lowest operating costs and huge untapped base of LIC agents ATS: 1.2 million Marketing: 70% loan melas, 30% walk-ins, referrals Key Highlights: Consolidate in existing markets, expand after studying the regional credit cultures 14

15 Competitor Analysis REPCO fares well in terms of key financial fundamentals when compared to its competitors Repco has the highest net interest margins due to its unique customer base Repco has second lowest cost of funds Repco s gross NPA has been reducing which shows better asset quality Repco has second lowest operating expenditure due to its unique marketing strategy Repco has a lower leverage as compared to its competitors DHFL GIC CanFin LICHF REPCO IBHL NIM (%) RoE (%) RoA GNPA (%) NNPA (%) Spread (%) Cost of Funds (%) Repco has recorded one of the highest CAGR in terms Source: of loan Company s book annual reports growth in the last 5 years EPS (INR) The figures represent 2015 figures; sparkle lines represent a time series analysis over a 4 year period 15

16 Competitor Analysis Unlisted Competitors: Major sources of differentiation Key Highlights Shubham Housing Developme nt Finance Swarna Pragati Housing Microfinan ce Aptus Value Housing Finance India Home First Finance Company Micro Housing Finance Corporati on AU Home Finance GNPA does not include unsecured and secured classification as well as NPA below 1 year. Regional Clout North South South West West Northwest Predominantly single-state players serving the self-employed segment Revenue Growth 121.1% 85.4% 43.7% 93.1% 49.0% 88.0% Higher profitability shown by all firms when compared to previous years Growth in Expenses 117.2% 81.2% 33.2% 91.7% 54.7% 64.2% The cost of financing is greater than that for current set of firms GNPA 4.2% 0.0% 0.0% 0.0% 0.0% 0.52% Source: Annual filings with ministry of corporate affairs 16

17 Investment Rationale - Penetration in high growth geographies REPCO is present and is planning to expand in states with high demand Shortages in numbers Housing shortages where in states where RHFL operates Maharashtra 10.5 Mn AP & telangana 7.7 Mn Tamil Nadu 5.7 Mn 5.5 M 5.0 M Urban 3.7 M 4.0 M Rural 3.9 M 1.8 M West Bengal 7.7 M Gujrat 5.1 M Karnataka 4.9 M Source: Naredco RHFL plans to focus on consolidation in its existing markets for the next 2-3 years by improving its penetration, thus increasing its market share of high growth geographies. 17

18 Investment Rationale Government Impetus Government policies and initiatives are highly favorable for REPCOs strategy Pradhan Mantri Awas Yojna Housing For All RHFL already has centers in 50 locations listed under PMAY-HFA Urban. 66% of RHFLs loan book consists of housing loans in Tier II and Tier III cities. RHFLs average ticket size of INR 1.2 Million belongs to loans taken by LIG. Figures in INR LIG Maximum Monthly Income Maximum Annual Income 200,000 Maximum Affordability 800,000 Limit Typical Housing Cost 1,500,000-2,000,000 Affordability Gap 700,000-1,200,000 Indian Mortgage Guarantee Corporation (IMGC) A venture of RBI, NHB, ADB, IFC and Genworth Launch of National Investment and Infrastructure Fund Expected moderation in CPI inflation, lower interest rates due to RBI policies National Gramin Awas Yojana, Affordable housing in Partnership Source: NAREDCO 18

19 Investment Rationale REPCO is a focused integrator with a unique value proposition of Higher margins from the non-salaried class willingness to pay for customization and convenience of loan offerings and its ability to keep its cost low. Financing HR Source of fund, fixed debt/equity ratio, capping of LAP requirement Recruitment of Local employees, Managerial decisions. Operations (lowers cost) Outbound Logistics (increases Willingness To Pay) Marketing & Sales (lowers cost) After-Sales service (increases Willingness To Pay) Expansion through Satellite centers. One man satellite centres is opened to gauge the demand. Lean Branch Model. Per person business is nearly $1.5 million. Located near to the customers. Each branch operates within a 25-30km radius. Loan camp Word of mouth referrals Higher number of customer walk ins due to brand equity Daily/weekly collection Cash collection facilities as customers not accustomed to banking system Low fee income More number of centres can be opened due to lower cost of opening a centre More number of centers allow better customer service and customization, making after-sales service easier Better reputation reduces costs and efforts for marketing. After sales service increases WTP 19

20 Investment Rationale Lowering costs through Financial Decision Making Cost of funds 9.40% 9.50% Source: Annual Report 9.50% 9.30% * Due to IPO 8.30% FY 11 FY 12 FY 13 FY 14 FY 15 Source of funds (%) repco bank NHB bank bonds 3 Diversified sources of funding brings down its costs despite reductions in NHB re-financing. It has fixed its Debt-Equity ratio at 6 whereas its competitors generally maintain a DE ratio of 10. Their credit ratings have been upgraded recently to AA-(ICRA) Repco has also chosen to cap its LAP segment to 20% so that it can avail NHB refinancing with interest rate of 7.5% to 8% (Banks > 10%) LAP s are also riskier and more competitive currently as they are more profitable Source: Annual Report 20

21 Investment Rationale Experience leading to sustained competitive advantage for Repco. 1 Asset Quality - NPA figures FY 12 FY 13 FY 14 FY 15 GNPA % NNPA % Source: Annual Report V R I N E Experience Brand Equity HR X Location X X IT X X X The 15 years of experience RHFL has given it a sustained advantage. Improving asset quality of Repco despite lending to a much riskier segment due with improvements in available technology and experience. Repco employees are also expected to take a call whether to grant loans to the people or not which again requires training and experience. Hiring the people who know about the local language and also who have an understand of the housing industry is extremely essential for a local player like Repco Because housing loans require heavy documentation which is generally done in the local languages in tier 2, tier 3 towns 21

22 Investment Rationale Controlling operating expenses leads to sustained competitive advantage Operating Expenses (%) HFCs Like Repco Bank like SBI HFC s like Dewan, IBHL Home Loan Rate 9.2% 9.2% 9.2% LIC REPCO IHFL GIC Dewan CanFin Source: Annual Report Typically leads are found out of which get converted for a loan. The cost of organising a loan camp is around Rs versus average disbursements of Rs 2 crore translating to origination cost of just 0.2%. The competitors spend a much greater amount on Direct sales agents, teams and agencies to secure the highly sought after salaried class. In a rate driven regime like India, controlling operating expenses is a vital source for competitive advantage Effective Yield 9.6% 9.6% 9.6% Yield on SLR 6.7% 7% 7% Effective yield 8.1% 9.48% 9.6% on Portfolio CoF 4.78% 6.99% 7.7% NIM 3.32% 2.49% 1.87% Op Ex (of 2.0% 0.20% 0.35% revenue) Fees- 0.1% 0.15% 0.1% Commission NPA (of 0.1% 0.25% 0.1% revenue) PBT 1.32% 2.19% 1.52% 22

23 Investment Rationale Repco differentiating itself through customization and convenience. Customization Mainly people with cash first business. Relaxing of EMI norms in Quarter 1 and Quarter 3 when festivals like Pongal and school fee payments impose a financial strain on the non-salaried class. Repco gives leeway in case of EMI if debtor fulfills his obligation in Q2 and Q4 with nominal or even no fines. Built a strong reputation due to loans disbursed effectively to repatriates to resettle in India. Convenience As the per capita income of lower income group is expected to rise maximum, RHFLs focus segment will generate even more revenue. EMI collection in cash customers are not exposed much to the banking system. Daily and Weekly collection from the houses. Higher willingness to pay and greater brand equity 23

24 S E C T I O N O N E Creative Visual Design Investment Rationale Currently trading at lower multiples as compared to precedent transactions of competitors Listed Competitors Average P/BV 2.71 Unlisted Competitors Average P/BV 7.92 Average P/E Repco Home Finance Average PE 68.6 Unlisted sector: Catering to regional, selfemployed customer segments and trading at much higher multiples when compared to Repco (using the precedent transaction analysis) P/BV : 4.87 P/E: Repco s greater experience and deeper pockets will help it grow more in future as compared to its unlisted peers 24

25 Valuation Fundamentals Internal and external parameters affecting REPCOs valuation 7.6% 5.5% % 2.9% Risk Free Rate Market Risk Premium Adjusted Beta Cost of Equity Spread Current 10 year government security yield Historical market return of Nifty Market returns ( )= 13.1% Average Beta of competitors (weekly return) since Apr 2011: 1.1 CAPM method Cost of Funds: 9.5% Average loan rate charged: 12.4% 25

26 Valuation models Residual Income Valuation Intrinsic valuation - Current book value of equity and growth potential pegs REPCOs share price at Rs. 699 Current Book value per share: Rs Loan disbursement is expected to grow at 25% till 2022 piggybacking on the demand created by PM Awaas Yojna 25% 25% Post 2022, the growth rate is projected to decline linearly to long run GDP growth rate of 5% in the next 10 years. Rs. 699 Expected share price of REPCO 5% 5% Loan Disbursement Growth Rate 26

27 Forward P/E (2017) Valuation models P/E multiple based relative valuation Relative valuation PE multiple of competitors and REPCOs expected EPS growth rate pegs its share price at Rs LIC GIC IHFL DHFL Expected EPS Growth rate REPCO CanFin We have done relative valuation of the firm using a two period forward PE (2017) ratio using the five competitors, which have been described earlier. The target forward PE ratio 19.6 is obtained as a function of EPS growth and the consensus PE of the comparables. 25% 19.6 Expected EPS growth of REPCO Expected forward PE of REPCO 0% 5% 10% 15% 20% 25% 30% Reducing Expected EPS growth rate from 28.9% to 25% by adjusting REPCO provision coverage ratio similar to competitors Rs. 761 Expected share price of REPCO 27

28 Forward P/B (2017) Valuation models P/B multiple based relative valuation Relative valuation PB multiple of competitors and REPCOs expected Return on Equity pegs its share price at Rs REPCO CanFin LIC IHFL GIC DHFL 0 10% 15% 20% 25% Expected RoE We have done relative valuation of the firm using a two period forward PB ratio (2017) using the five competitors, which have been described earlier. The target forward PB ratio 3.67 is obtained as a function of expected RoE and the consensus PE of the comparables. 22% 3.4 Expected RoE of REPCO Expected forward PB of REPCO Rs. 750 Expected share price of REPCO 28

29 Valuation An ensemble of the valuation models pegs REPCO s share price at Rs % 33.3% 33.4% P / E m u l t i p l e r e l a t i v e v a l u a t i o n P / B m u l t i p l e r e l a t i v e v a l u a t i o n R e s i d u a l I n c o m e V a l u a t i o n Current Price(as on 5 th April, 2016) 625 Comparable based valuation Target Price % Upside Potential 29

30 RISK Financial Risk CAMEL approach to analyze REPCO makes it standout positively in terms of Financial risk Capital Adequacy Capital Adequacy D/E Capital/Total Assets Liquidity Current Ratio L E C CAMEL M A Asset Quality Gross NPA/Loans Return on Assets Management Expenses/Assets Return on Networth 5 CAN FIN 3 LICHF 2 GIC 4 DHFL 1 REPCO Earnings Interest Income/Assets Parameters Can Fin LICHF GIC DHFL REPCO Capital Adequacy (C ) Asset Quality (A ) Management (M ) Earnings (E ) Liquidity (L ) Average

31 RISK Business Risk We think REPCO has medium business risk, as we identified low likelihood scenarios with varying impacts High geographical Concentration 63% of loan book comes from TN, however the company has started moving to other territories Competition Entering into REPCO s target markets of Tier II and III cities 3 Riskier Customer base Targets non-salaried segment which might result in higher NPA 4 5 PM Awaas Yojna If this plan doesn t take off the expected loan book growth might be lower 6 Decrease in Housing prices in Tier I cities Effect of RBI s policies RBI measures to improve housing scenario in India can lead to lower housing prices in Tier I cities, which is untapped. Increase in interest rates might adversely impact the overall industry 7 Land Acquisition Bill If this bill is not passed it will impact construction of real estates and thus impacting loan book growth 31

32 RISK Model Risk Monte Carlo simulation applied to our valuation model shows a positive return with worst case long term growth rate Monte Carlo Simulation Sensitivity to Long Term Growth LT Growth varied using normal distribution and SD of India s GDP growth (3%) % Confidence level > % - 41% (implied upside potential) LOW Risk 32

33 RISK Model Risk Monte Carlo simulation applied to our valuation model shows a positive return with worst case cost of equity Monte Carlo Simulation Sensitivity to Cost of Equity Cost of equity varied using a lognormal distribution (lower limit 7.6%, SD 2%) 95% Confidence level > % - 36% (implied upside potential) Medium Risk 33

34 RISK Model Risk Monte Carlo simulation applied to our valuation model shows a positive return with worst case spread Monte Carlo Simulation Sensitivity to Spread Spread Varied using triangular distribution (1.9% - 3.9%) % Confidence level > % - 34% (implied upside potential) Medium Risk 34

35 RISK Model Risk Monte Carlo simulation applied to our valuation model shows a breakeven with worst case disbursements growth Monte Carlo Simulation Sensitivity to Disbursements Disbursements growth varied using triangular distribution (20%-30%) 95% Confidence level > % % (implied upside potential) Medium Risk 35

36 Cost of Equity Valuation Model Analysis A sensitivity and scenario analysis of valuation model strengthens our BUY recommendation 737 Base Case 18% 10% Sensitivity Analysis 819 Best Case 31% Long Term Growth Rate 4.00% 4.50% 5.00% 5.50% 6.00% 12.60% % % % % Scenario Analysis 687 Worst Case 36

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