|Name||Reco Date||Reco price||Target||Prospero Rating||Report Date*|
|Repco Home Finance||12Apr2013||Rs. 175||Rs. 300 – Rs. 350||9 / 10||12Apr2013|
A) Company background:
Repco Home Finance is a professionally managed Housing Finance Company (HFC), promoted by Repco Bank Limited, a Government of India owned enterprise.
As of December 31, 2012, it has a network of 73 branches and 19 satellite centers, 90% of which are located in South India. Further, 77 of these branches and satellite centers are located in tier 2 & tier 3 cities, and at the peripheries of tier 1 cities, based on its belief that they are underserved by larger HFCs and banks.
B) Investments arguments:
Multiple asset growth drivers in place: Well established presence in Tamil Nadu, setting up of new branches outside Tamil Nadu, continued strong housing demand in tier 2 and tier 3 towns and ability to serve the non-salaried customer segment has ensured loan CAGR of 41% over FY09-FY12. Its focus on tapping under-served housing markets and a small loan book base of Rs. 31bn as on September 2012 will ensure healthy asset growth in foreseeable future.
Focus on under-served markets to ensure strong yields: Small ticket sizes, low proportion of population with fixed salaried income and high operating costs deter banks and HFCs in semi-urban areas. Repco, with its strong understanding of such markets, offers various home loan and mortgage products to salaried as well as self-employed individuals. As such, it is able to command higher yields – Repco’s home loan rates to self employed are ~13% vs. 11% charged by banks in urban areas, a differential which we believe is sustainable.
Well defined appraisal and monitoring process ensures prudent asset quality: Sourcing is largely handled by branch employees through loan camps. Appraisal process involves mandatory visits at the property to be financed, visit at borrower’s place of work, customer interview with the branch manager, legal opinion in case of large property and final approval from the head office. Staff compensation structure attaches equal importance to sourcing, servicing, monitoring and collections, thus incentivizing them at every stage of business. LTV cap at 55% for self employed and 65% for salaried customers build additional margin of safety.
Well capitalized for growth, valuations attractive: With post issue tier 1 capital comfortably above 25%, the company remains well capitalized for future growth. Presence in under-served markets, well defined appraisal processes and low operating cost structure will enable strong earnings growth and sustainable RoEs of 20%. Valuations at 1.5x FY14e book are attractive.
*Report Date may sometimes be different from Recommended Date as drafting of reports can take time.