Value Investors avoid IPOs saying Its Probably Overpriced. But when Repco Home Finance came out with its IPO, it immediately caught my eye.... Maybe because of Representative Bias (similar business to Gruh Finance, a huge wealth creator) or because of Authority Bias. Or maybe because of superb business fundamentals & great past record.
But to build a solid conviction, good performance after IPO was a must. And Repco has delivered exactly what the doctor ordered.
Repco is in the business of housing finance. What separates it from other housing finance comps & banks is its Tier-II & Tier -III focus, Small average loan size (<10 lakhs) & loans to non-salaried class.
If you are holding for Long Term, what's more important is how the business will look in the future than what is looking right now!!!
Based on this logic, I tried to project how Repco will look after FY2017-18... i.e 5 years down the line. Here is my take-
Assumptions- 25% annual disbursements growth, 20% annual repayments growth, NIM of 3.5%, Div Payout of 15%, Gross NPA at 1%, Tax rate of 25%.
Facts underlying the assumptions-
But to build a solid conviction, good performance after IPO was a must. And Repco has delivered exactly what the doctor ordered.
Repco is in the business of housing finance. What separates it from other housing finance comps & banks is its Tier-II & Tier -III focus, Small average loan size (<10 lakhs) & loans to non-salaried class.
If you are holding for Long Term, what's more important is how the business will look in the future than what is looking right now!!!
Based on this logic, I tried to project how Repco will look after FY2017-18... i.e 5 years down the line. Here is my take-
| 2013 | 2018 | |
| Equity | 634 | 1200 |
| Debt | 3158 | 9749 |
| Good Assets | 3514 | 10721 |
| NPA | 36 | 108 |
| Cash | 210 | 67 |
| Other Assets | 32 | 52 |
| NII | 125 | 375 |
| Other Income | 15 | 24 |
| Provisions | 9 | 16 |
| Cost | 24 | 66 |
| PBT | 107 | 318 |
| Tax | 27 | 79 |
| PAT | 80 | 238 |
Assumptions- 25% annual disbursements growth, 20% annual repayments growth, NIM of 3.5%, Div Payout of 15%, Gross NPA at 1%, Tax rate of 25%.
Facts underlying the assumptions-
- There is Huge Demand for housing loans especially from Tier-II & Tier-III cities and especially from non-salaried class due to under penetration.
- Repco can Supply its product (loan) to meet this demand due to good Capital Adequacy Ratio having raised capital from IPO.
- The segment is Niche & there is limited competition due to small loan size, non-salaried customers.
Aggressive Assumptions?
The assumptions that I have taken are conservative, IMHO.
- Assumed 25% disbursements growth while comp has been growing at 40% historically.
- Assumed NIM of 3.5% while it was 3.9% last year & should improve as Repco's debt rating improves.
- Company's NPA has only been notional till now, it has hardly lost money as bad debt to customers.
On a PAT of 240 crs & Book Value of 1200 crs, Repco can trade at 3600 crs Mcap {15 times PE & 3 times PB}...
A cool 3 bagger in 5 yrs time.. with a CAGR of 22%.
Risks-
A cool 3 bagger in 5 yrs time.. with a CAGR of 22%.
Risks-
- Rash Lending- With so much cash at disposal, company can go into imprudent lending, resulting into bad debts & hence losses, which may hurt the shareholders.
- Slowdown in Home Purchases- Any slowdown in real estate activities can hurt the company.
My perception is this is a business that an idiot won't be able to run! And so management quality is a very important factor if someone is looking to invest in this. Thoughts?
ReplyDeleteYa, an idiot mgt may go on to hit the asset quality..
DeleteSo change in mgt &/or mgt policy is a thing to watch for.
absolutely concur with shouryamoy.MANEGERIAL QUALITY IS OF THE ESSENCE (ESP IN THE ABSENCE OF A LARGE DISCOUNT TO TANGIBLE BOOK VALUE).
ReplyDeletealso one needs to take into account for the upcoming wave of competition which is about to hit the financing sector in general and banking in particular.
Lowering of NIM's seems to be a foregone conclusion.
Asset quality in the sense that it lends to lower income groups which seem to be prone to a contraction of income in the face of sluggish economic growth(and what the company is doing to account for the addiditional risk) too needs to be pondered upon
Anyways keep up the contrarian thinking,nice to see somebody from my side of dalaal street willing to cut through the biases plaguing a typical value investor
tc
Agree on importance of management..
DeleteNIM should increase in my view, with interest rates expected to fall & company's debt ratings improving.
Gross NPA at 1% is an aggressive assumption. would need lot of skills to achieve and maintain this across business cycles.
ReplyDeleteAny particular reason for this assumption?
Check their history... In more than a decade, they have very very less actual capital loss..
DeleteNPAs can occur in books when you lend to people with unstable & seasonal income.
Is there a thumb rule that relates loan book, sanctions and disbursements? Shouldn't sanctions be the same as disbursements?
ReplyDelete(Year) End Loan Book= Start Loan Book + Disbursement - Repayments
Deletekinda similar to cash... Ending cash = starting cash + cash profit - dividends paid.
Sanctions will become disbursements.. but timing difference will make both different.. Like sanctions at the end of year will become disbursements in next yr only.
Thanks for sorting that out!
ReplyDeleteSince you have talked about the next 5 years, would the increased bank licenses result in more competition? Thereby hurting the returns? Meaning, loan book/disbursements may not grow that fast?
That's possible... But I think new banks would take time to work efficiently, & house loan penetration is low in India, so Repco should still do fine.
DeleteGreat Conviction. I came across your blog from Valuepickr.com. Thank you for posting this. I hope you were able to enjoy multibagger gains. I would love to know your current views on Repco.
ReplyDelete