Gruh finance - Mini Hdfc

Gruh Finance Ltd (GFL), a subsidiary of HDFC Ltd., was promoted in the year 1986. The company is a leading small ticket size housing loan provider with predominately based in tier 2 and tier 3 cities & towns in the states of Maharashtra and Gujarat driving ~70 percent of business.

The company's loan assets have grown rapidly at 24 percent CAGR in last 10 years and with, rapid geographical expansion; we expect the tempo of growth momentum to continue at 24-26 percent CAGR for next 3-5 years. We initiate coverage on the stock with 'BUY' rating.

Investment Rationale:

Niche presence in relatively high growing market:

The Company predominately provides low ticket size housing loan to individual in salaried and self employed categories. The company is comfortably positioned with regards to loan to value ratios with average outstanding loan per head at 4.61 lakh as compared to average cost of dwelling unit at Rs7.5 lakhs. Gruh operates in tier 2 and tier 3 cities and towns in the states of Maharashtra and Gujarat which is not only growing rapidly but are relatively matured market as compared to other emerging real estate geography.

Over the year, due to rise in property price index, the incremental credit per head is enhanced to Rs7.25 lakh. The company is on a rapid geographical expansion mode to add ~10-12 branches per year in growing real estate market like Rajasthan, Madhya Pradesh and Chhattisgarh etc. Gruh has innovative products viz GRUH Suraksha, GRUH Suvidha, GRUH Sajavat and GRUH Samruddhi to lend for different housing needs.

Enjoys premium spread and NIM:

The Company being present in niche segment, enjoys on an average over 13 percent yield on advances with healthy spread of over 4 percent and net interest margin ~5 percent. These markets require tremendous of skill and experience to manage risk and understand the demographic nature of borrowers. The company has proven business model with 90 percent loan asset comprises of individual loan and over 40 percent business coming from rural areas.

To ensure a deeper geographic reach, GRUH has been sourcing retail business through third party channels by appointing GRUH Referral Associates (GRAs). GRAs only source loans while GRUH retains control over the credit, legal and technical appraisals. Business sourced through GRAs was 58.6 percent of incremental credit for the year FY12.

Well capitalized balance sheet:

The NHB guideline has mandated minimum 12 percent Capital Adequacy Ratio (CAR). The company has maintained on an average ~15 percent CAR since last 4 years. We continue to believe that, Gruh would maintain over 14 percent CAR going forward.

Impressive growth in loan assets with low NPA

Despite the weak economic outlook and sluggish real estate market, loan disbursement has grown at a 27 percent CAGR between 2009 and 2013 from Rs2091 crore to Rs5438 crore in respectively. We expect the loan asset to further grow at a 27 percent CAGR for next 2 years between FY13A and FY15E to Rs8832 crore. Despite impressive growth in loan assets, the quality of outstanding credit remains intact, in fact the Gross Non Performing Assets (GNPA) as a percentage of outstanding loan asset has reduced to 0.32 percent in FY13 from nearly 1 percent in FY09.

100% provisioning coverage with rapid expansion on card

GFL has taken steps over and above the NHB guideline on provisioning requirement. The Net Non-Performing Assets (NNPA) is NIL since last 5 years.

Attractive affordable home finance market

Due to rapid urbanization, the shortage of urban house stands at 18.8 million units (as per census 2011) ~99% is towards EWS/LIG/MIG. According to the working group of rural housing, for Twelfth five year plan (2012-2017) the estimated shortages of housing is expected to be ~44 million units, nearly 90% of these shortage is with respect to the population below poverty line (BPL).

Housing finance market for loan between Rs3-10 lakh is estimated over Rs1 trillion. Gruh's average ticket size of loan is less than Rs5 Lakh whereas incremental credit per head is ~Rs7.25 lakh which falls under Rs3-10 lakh categories which is driving the overall demand. Only 20% of total loan disburse in FY 2011 were loan in the bracket of 3-10 Lakh.

Quick Q on Q comparison

performance on the key financial parameters is as follows:

                                                                                                  (Rs. in crores)

Particulars	Half Year ended September 30, 2014	Half Year ended September 30, 2013	Growth %
Net Interest Margin	159.52	124.87	28%
Non-Interest Expenses	33.32	29.20	14%
Operating Profit	142.47	107.92	32%
Profit Before Tax	128.71	95.54	35%
Profit After Tax	85.00	68.12	25%
Loan Assets	7910.15	6142.90	29%
Loan Disbursements	1503.15	1197.15	26