21 March, 2016
Price: Rs. 587.75
While the public sector banks are suffering due to the concerns around high non-performing assets (NPAs), private banks and selected non-banking financial companies (NBFCs) have become the recent favorites among the investors. In the NBFCs space, we are bullish on Repco Home Finance (“Repco Home” or the “Company”). The bullish view comes on the back of robust growth of more than 20 % in loans, sanctions and disbursements. Besides, the management has also given strong guidance of more than 25 % increase in loan book and profitability due to rising penetration of tier 2 and 3 cities in the coming 1-2 years.
Repco Home operates in a niche segment, which is under-served by banks and larger housing finance companies. The Company is present in 2 segments – Individual Home Loans and Loans against Property and provides loan products to individual borrowers in both the salaried and non-salaried segments.
Robust Loan Growth Coupled With Healthy Asset Quality
Over the last five years (i.e. 2011-2015), loan books have grown at a CAGR of 30%. For the same period, profit after tax grew at a CAGR of 21 %. For FY 2015, Repco Home reported a healthy 29% loan growth (compared to 32 % for FY 2014) despite sluggish economy and lower loan off-take in both wholesale and retail segments. Net Profit for the same period grew 12 %. Net Interest Income grew by only 24 % in FY 2015.
The asset quality for Repco Home Finance is amongst the healthiest despite significant exposure to the non-salaried segment. Gross Non-Performing Assets (“GNPAs”) for FY 2015 stood at 1.30 % of gross advances, and Net Non-Performing Assets (“NNPAs”) came at just 0.50 % of customer assets. In the last few years, there have been many challenges with respect to NPAs for the financial sector due to bad economic and business environment. But Repco Home’s has maintained healthy asset quality primarily due to strong risk management practices. Repco Home also does not have any exposure to developer/builder loans, which has also helped it to maintain a healthy asset quality.
Focus on Branch Expansion
Initially the Company has kept its focus on South India, with over 83% of its branch network located in this region. However, over the past 3-4 years; Repco Home has been expanding in other states such as Maharashtra, Gujarat, West Bengal and Odisha by opening branches and satellite centres. Currently, the Company has its presence in 11 states and 1 Union Territory with 113 branches and 38 satellite centres.
Going ahead, the Company plans to add 15 branches annually, with approximately two-thirds in the South and the remaining in the Rest of India.
Focus On Self-Employed and Underserved Areas
Repco Home’s business model focuses on the segment which is largely under‐served, especially in smaller towns and cities i.e. tier II and III cities. This strategy has favored the Company as most tier I cities are widely catered by banks and big NBFCs, thereby leaving limited room for a small & new player, who will not be able to survive the huge competition.
Taking advantage of this, Repco Home has carved a niche for itself by (i) Focusing on tier II and III cities. This leads to lower competition from banks and other HFCs leading to high advances growth, (ii) Focusing on the self-employed segment which is highly under penetrated and relatively less competitive and offers higher yields.
As per the National Sample Survey office, the self employed segment accounts for 34% of the workforce but accounts for ~10% of the loans. Realizing the size of opportunity, Repco Home has made its strong presence into this segment. Repco Home has more than 50% of its loan book exposure to self employed segment.
Repco Home has 63% exposure to Tamil Nadu and the four southern states contribute approx. 90% of the loan book. Any adverse impact from politics, economic downturn, or natural calamities poses a risk to its business growth and asset quality.
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About the Author
Rajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.Follow @SanaSecurities