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Gruh Finance Ltd

Stock Data No. of shares Market cap 52 week high/low Avg. daily vol. (6mth) Bloomberg code Reuters code : 17.80 Cr : Rs. 3871 Cr : Rs 250/ Rs 112 : 165,249 shares : GRFH IN : Gruh.BO

218 Target Price: Rs 266 Potential Upside: 22% Absolute Rating: BUY

CMP: Rs

Shareholding (%) Promoters FIIs MFs / UTI Banks / FIs Others : : : : :

Dec 12 Dec-12 59.86 14.34 1.08 0.02 24.7

QoQ chg (0.04) (0.70) (0.62) 0.00 1.36

Relative Performance
30000 20000 10000 0 Jan-12 BSE_SENSEX Jul-12 300 200 100 0 Jan-13 GRUH Finance Ltd

Strong Financials – A play on the growing rural housing demand
Financial Summary
Y/E Mar FY11 FY12E FY13E FY14E PAT (Rs. Cr) 91.5 120.3 134.7 164 9 164.9 EPS (Rs.) 5.2 6.8 7.6 93 9.3 Change YoY (%) 32.7 31.5 11.9 22 4 22.4 P/E (x) 22.2 22.8 29.5 24 1 24.1 BV (Rs.) 18.1 21.8 26.7 33 2 33.2 P/BV (x) 6.4 7.1 8.4 68 6.8 Net NPA (%) 0.0 0.0 0.0 00 0.0 Adj BV (Rs.) 18.1 21.8 26.7 33 2 33.2 P/Adj.BV (x) 6.4 7.1 8.4 68 6.8 RoE (%) 31.4 34.2 31.5 31 2 31.2 RoA (%) 3.1 3.2 2.9 28 2.8

Source: Axis Securities, Bloomberg

Source: Company, Axis Securities Ltd.

Pankit Shah
Asst. Vice President
Pankit.shah@enam.com (+91 22 6680 3623)

January 30, 2013
“The name of the company has changed to AXIS Securities Limited in the records of Registrar of Companies, Mumbai. Awaiting approval for change of name from Exchanges and SEBI”.

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augurs well for housing finance industry 1.000 (mn) (%) 66 64 62 60 58 56 Working pop Ratio (RHS) 60% of India’s population is below 30 yrs of age and that along with rising middle class -.Housing Finance–Secular Growth to Continue India has low Mortgage Penetration as a % of GDP 120 100 80 60 40 20 0 UK U US SA HongKon ng Taiwa an ea Kore Denmar rk German ny Singapor re Chin na Malaysia Thailan nd India 48 41 39 104 88 81 800 600 32 29 400 20 20 17 9 200 0 1991 1995 2000 2001 2005 2010 2015 2020 India’s rising work force shall lead to more demand for homes 1.500 1. 2 . ENAM Research. Bloomberg.200 (mn) Improving affordability 45 36 27 (Rs lacs) (%) 25 20 15 10 5 0 1995 1996 1997 1998 1999 2003 2004 2005 2006 2007 2008 2009 2010 2000 2001 2002 2011 900 18 600 300 0 1991 1995 2000 0-19 2001 20-45 2005 2010 46-60 2015 61+ 2020 9 0 Property Cost Annual Income Affordability (RHS) Source: Company.

3 . ENAM Research. Bloomberg.Niche Presence in Economically Vibrant States of Gujarat and Maharashtra Housing Price Index Holding on In spite of slowdown 350 300 250 200 150 100 50 Maharashtra and Gujarat Continue to Witness Robust Growth 14% 12% 10% 8% 6% 4% Jaipur Jaipur Kolkata Kolkata A hmedabad Ah hmedabad Bengaluru B Bengaluru Chennai Chennai Mumbai Mumbai Bhopal Bhopal Surat Surat Pune Pune 0 2% 0% F Y 08 F Y 09 Gujarat F Y 10 Maharashtra F Y 11 All F Y 12 July-Sept 2010 Index Oct-Dec 2011 Index Oct-Dec 2010 Index Jan-Mar 2012 Index Jan-Mar 2011 Index Apr-Jun 2012 Index Apr-Jun 2011 Index Jul-Sep 2012 Index Jul-Sept 2011 Index Per-Capita Income in Maharashtra and Gujarat 80000 60000 40000 Government’s expenditure on Rural Sector 50000 40000 30000 20000 20000 0 FY07 FY08 Gujarat FY09 Maharashtra FY10 FY11 FY12 10000 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13e All India S Special i lP Programmes R l Employment Rural E l t Oth Others Source: Company.

„ The company has also introduced personal loans under the Sahyog scheme for its existing home loan customers with a view to meet their other financial needs like education. Under this product. „ Th The Company C h designed has d i d a new variant i of f home h l loan product d – Gruh G h Suvidha S idh – to meet the h requirement i of f a flexible fl ibl repayment plan for the self-employed and the skilled workers segment. Madhya Pradesh. Maharashtra. a customer is given an initial monthly installment that can match his present cash flows with an annual step up for each subsequent year over the tenure of the loan depending on likely future cash flow. 4 . holiday travel and wedding against the mortgage of residential properties. hospitalization. Gujarat.e. „ Apart from extending home loans and repair loans under its Suraksha and Sajavat schemes respectively. clinics etc under its Samruddhi scheme. Rajasthan. Gruh Finance is one of India’s leading housing finance providers focused in the rural and semi-urban sector. repair and renovation of non-residential properties like office premises. Axis Securities. Chhattisgarh and Tamil Nadu with first two forming more than 75% of total loan portfolio. Source: Company. „ Gruh has 121 retail offices across seven states of India i. Karnataka.Company Background „ Founded in 1986 by HDFC and AKFED. construction. „ It is recognized by NHB as an eligible housing finance company for refinance facility since 1989 and became a subsidiary of HDFC in June 2000. Gruh Finance offers loans to families for purchase.

The company is led by Mr. Keki Mistry (Nonexecutive Chairman) and Mr. Mr. S. „ Keki Mistry: Chairman ‰ Mr. „ Other Directors ‰ The company has 7 other directors all of which have been associated with the company for a fairly long time.M. 5 . Rohit Mehta (Member of the Audit Committee). Renu Karnad (Member of the Compensation Committee). Mankad and Mr. Choksey has been on the board of Gruh since May 1996. The members on the board include Ms. Prafull Anubhai (Member of the Audit and Investors’ Grievance Committees).G. Mistry is the non-executive Chairman of the company and the Vice-Chairman and CEO of HDFC Ltd. Palia: (Chairman of the Audit. Sudhin Choksey (Managing Director). S. Mr.G. He has been on the board of Gruh since 2000 and is a member of the Audit and Compensation Committees. Mr. Compensation and Investors’ Grievance Committees). He is a member of the Investors’ Grievance Committee. Krishnamurthy (Managing Director & CEO of HDFC Property Ventures Ltd (HPVL). Mr. K. Kamlesh Shah.Promoters . He was made the CEO of the company in 1998 and the Managing Director in 2000. „ Sudhin Choksey: Managing Director ‰ Mr. Mr. The Board of Directors comprises of nine directors .three of whom are from HDFC.Background „ The senior management of the company is fairly experienced and is closely aligned with its parent company.

NHB The change in composition of the borrowing mix will help in drastically bringing down the borrowing cost for the company and hence aid the company in maintaining its robust margins in the years to follow. . commercial paper and public deposits. with the balance coming from states like Madhya Pradesh. Axis Securities. Karnataka. Tamil Nadu and Chhattisgarh „ Riding on strong housing demand.52% 52% and Net NPA – Nil) „ Robust NIMs backed by consistent operating performance ‰ ‰ NIMs at ~ 5% in the last 2 years are amongst the best in the industry Cost to Income co e Ratio at o at less ess than t a 20% 0 is s lowest o est a among o g its ts peers pee s following o o gb branch a c based bus business ess model ode „ Best in class Return Ratios ‰ ‰ ROA in excess of 3% ROEs of ~ 30% „ Stable Borrowing Mix ‰ Apart from conventional bank borrowings and re-finance facilities from NHB. the company has regularly tapped other financing sources such as NCDs. GRUH has reduced its reliance on bank borrowings in favor of facilities from NHB. 6 Source: Company. the company operates 121 retail offices across seven states Gujarat and Maharashtra also accounted for +75% of the disbursements in FY12. the company provides sustainable growth trajectory ‰ Disbursements have grown at a CAGR of 26% and PAT at 32% over the last 5 years. Rajasthan. „ Well managed Asset Quality with 100% Loan coverage (Gross NPA of 0 0.Investment Rationale „ Niche presence in the semi-urban and rural areas of Gujarat and Maharashtra ‰ ‰ Overall. In the last few years.

the company operates 121 retail offices across seven states. 1.50% Primary presence in fast growing states of Maharashtra and Gujarat Gujarat.67% Maharashtra.68% 3 68% Source: Company. it has now commenced lending operations in Karnataka. 37. Sector 38% Businessmen 18% Professionals 2% Employed Private Sector 22% „ Gruh Finance is a small-sized. „ Gruh is primarily concentrated in the fast growing states of Gujarat and Maharashtra which account for more than 75% of disbursements.79% Rajasthan 3. niche player in the housing finance market providing low ticket housing loans to customers from semiurban and rural areas.Niche Presence in the Semi-urban and Rural Areas Customer Profile Self Employed 20% Employed Govt.88% Karnataka 3. Madhya Pradesh.94% 57% 56% 56% 58% Tamil Nadu 2. 39.28% Chhattisgarh. „ Overall. Axis Securities. Majority of loan book for Housing Finance to Salaried Individuals 120% 100% 80% 60% 40% 20% 0% FY08 Salaried FY09 Self Employed FY10 FY11 FY12 Others . Chhattisgarh and Tamil Nadu. 7 .75% Madhya Pradesh 10. Gruh is able to maintain its spread which protects its margins. „ Given its pricing power in predominantly rural and semi-urban markets.Individuals Developer Loans 61% 4% 33% 4% 37% 3% 39% 3% 39% 4% 36. Rajasthan. „ After the success in these 2 states.

we expect loan book growth of ~26% over FY13-15 with steady NIMs at ~5%.2 16. Axis Securities. 0 Ma aharashtra FY12 FY13E FY14E Karnataka Rajasthan Gujarat MP Taluka Gruh Presence 8 . „ During FY07-12.0 15.0 15. the disbursements increased at a CAGR of 26% while loan assets grew at CAGR of 24%. „ Over 90% of loan portfolio comprises of individual housing loans with rural loans contributing 43%.0 Client Relations across most of the districts and Talukas 400 15.0 FY08 FY09 FY10 FY11 CAR Source: Company.0 18 2 18.6 13. „ Expansion into newer territories coupled with Maharashtra and Gujarat’s growing economy has helped Gruh Finance to step up its loan book . Well Capitalized Balance Sheet 20 0 20.2 16.Sustainable Growth Trajectory… Healthy Disbursement and Loan Book 8000 6000 4000 2000 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E „ Gruh Finance is likely to continue benefiting from rising rural cash flows on back of its expertise in semi-urban and rural areas and proven business model. O/S Loan Book Disbursements „ Considering growth potential in newly entered states and Gruh’s building capability.0 0.0 300 200 100 224 357 291 215 120 63 66 259 175 89 25 Ch hhattisgarh 22 TN 240 209 5.0 10.3 14.

4 0.2 Dewan Housing GIC Housing LIC Housing HDFC GRUH Finance 0 20 40 60 80 81 83.9 1.2 0. the average size of loans offered by Gruh is small with more than 70% of the properties financed with loans of less than Rs.1 0.4 0.0 1. „ Efficient credit approval and recovery mechanisms along with strong cash flows have helped the company to keep Net NPAs at Nil.5 100 100 100 100 0.6 0.0 80.0 0.0 1.8 1.0 FY08 0.8 0.1 0. 9 .0 FY14E 50.0 FY09 0. 10 lakhs.0 60.0 FY11 0.0 FY07 120 0.4 1.8 1 „ Gruh’s loan book is characterized by middle-income borrowers. „ Given its large concentration in Tier II and Tier III city.0 1. „ Most loan approvals passed stringent ratio criteria such as healthy loan-tovalue and installment to income ratios.Well Managed Asset Quality with 100% Loan Coverage GNPA (%) Dewan Housing GIC Housing LIC Housing HDFC GRUH Finance 0 0. „ Over past 5 years.0 1.6 1.0 FY12 0. with modest ticket loans and comfortable Loan to Value Ratio.0 FY13E 0. despite exposure to a risky segment. Provisional Coverage (%) Well managed asset Quality (100% PCR and NIL Net NPAs) 100 100 100 100 100 100 100 100 100.0 70.0 FY10 0.0 2. Gruh Finance has maintained Gross NPAs at ~1 along with 100% provisional coverage ratio.0 90.0 Net NPAs (%) Gross NPAs (%) PCR (%) Source: Company. Axis Securities.

interest rate sensitivity is lower for middle to low income group since effective interest rates are lesser due to tax benefits of upto 2. Due to such entry barriers. cost of collection is higher as repayment through outstation cheques delay actual realization of funds. „ Operations in rural and semi-urban areas entail significant cost in terms of client assessment and customer acquisition due to small ticket loans and servicing of customers at rural locations. Source: Company. Consequently. Axis Securities. more than 98% of its loan book comprises of floating rate loans. „ Besides. „ Besides.5 lacs per annum.Robust NIMs Backed by Consistent Operating Performance „ Gruh Finance enjoys pricing power in rural and semi-urban market due to low competition and low interest rate sensitivity. 10 . „ The company has been able to pass on increased cost of funds to borrowers and maintain its NIMs at ~5% during past 2 years. We expect the trend to continue going forward . „ Moreover the company faces limited competition risk in the markets in which it is already operational as the lower to middle housing finance segment entails high cost of operation. Gruh Finance faces limited competition from small number of PSU banks and local money lenders. „ On demand side. Gruh Finance has been able to pass on increased cost of funds to borrowers and maintain its NIMs at ~5% during last 2 years.

4 145 130 145 160 120 80 40 0 FY09 FY10 FY11 FY12 FY13E FY14E 5 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E Operating Cost as % of Net Income Source: Company.4 15.5 33.5 13.5 43.6 14. Axis Securities.0 22.3 53. Lakh) Lowest Operating Cost in the industry 25 20 15 10 23 2 23.1 23.4 Avg yield on adv Avg Cost of Loan Funds NIM (Calculated) Business/Employee (Rs Cr) Profit/Employee (Rs.3 20 FY08 48.8 22.4 Strong Business per Branch 100 80 82 60 40 60.8 13.2 22.7 19. Business/Branch (Rs.1 18.7 Strong Business per Employee 40 30 20 4 20.5 19.5 19.Robust NIMs Backed by Consistent Operating Performance Robust NIMs 16 12 8 4 0 FY08 FY09 FY10 FY11 FY12 FY13E FY14E 6 5 4 3 2 1 0 20 11.1 19.4 12.6 24. Cr) 11 .6 17.8 89 115 95 87.7 12.7 50.3 10 0 FY08 FY09 FY10 FY11 FY12 FY13E FY14E 18.9 68.

0 31. 2.2 3. employees every year.0 2.0 20.3 3.25 „ The company is likely to witness steady improvement in operational efficiency over FY12-14.0 3.4 23.9 3.5 ROA (%) [RHS] RoA (%) Dewan Housing GIC Housing LIC Housing HDFC GRUH Finance 0 05 0.5 2 25 2.2 3.2 35. return ratios would remain attractive.5 1 15 1. which is centered on achieving healthy metrics without taking undue risks and compromising on balance sheet quality.1% during this period. „ Gruh Finance has always been gradual in expanding its branch network We expect the company to add 15 branches and 60 network.2% to 3.0 4. „ Consistent improvement in profit metrics is a reflection of strong traction in margins and tight control by the management over operating and credit costs.4 34.0 10.2 33. 12 .5 3 1.Best in Class Return Ratios Return ratios to remain healthy 40.5 1.0 FY08 FY09 FY10 ROE (%) FY11 FY12 FY13E FY14E 28. Axis Securities. Source: Company.0 1.7 2.5 2. „ Productivity ratios such as business per branch.0 30.2 35 3.9 24. „ ROE has improved from 24% in FY07 to 34% in FY12 while ROA has expanded from 2. stable NIMs and lower operating expenses.1 5.1 3. „ These best-in-class financial metrics reflect management quality and HDFC’s philosophy.6 3. „ Consequently.6 2. branch business per employee and profit per employee too would continue its steady growth path demonstrated over last 5 years.0 „ We expect Gruh Finance to report strong earnings over the next 3 years aided by solid loan book growth.

13 . GRUH has reduced its reliance on bank borrowings in favor of facilities from NHB. Banks 33. „ Moreover. basis) which provides a significant leeway in passing on interest rate hikes to customers and hence.93% Source of Borrowing Public Deposits 11.0% during this period. „ GRUH’s strong credit ratings (AA+ .07% „ GRUH Finance enjoys a stable and diversified funding profile.Tenure Short Term 6. along with demonstrated support from the parent HDFC Ltd.. Long Term 93. „ GRUH predominantly lends on floating rates (~99% of loan book is on floating basis). the share of loans from NHB has increased from 17.Stable Borrowing Mix Borrowing Profile . the company has regularly tapped other financing sources such as NCDs.88% Subordinated Debt 1.4% to 49. The proportion of bank borrowings in total funding mix declined from 52.ICRA.5% in FY07 to 34% in FY12. which is well supported by its parentage.04% NCD 3.40% „ The change in composition of the borrowing mix will help in drastically g g down the borrowing g cost for the NBFC and hence aid the bringing company in maintaining its robust margins in the years to follow. Re-financing facilities from NHB provide further comfort. „ Promoter backing ensures that GRUH is comfortably placed in terms of its financing requirements from both commercial banks and market instruments.70% National Housing Bank 49.98% Source: Company. Axis Securities. AA+ . NCDs commercial paper and public deposits. deposits „ In the last few years. „ Apart from conventional bank borrowings and re-finance facilities from NHB. mitigates interest rate risks. enables it to raise funds at competitive rates.CRISIL).

stable performance. Due to consistent growth prospects. we believe that the stock would continue to trade at a premium multiplier. „ We expect the company’s loan book to witness healthy CAGR of 24% during FY12-14 with steady NIMs at ~5%. Mean + 1 STDDEV -1 STDDEV 14 . „ Gruh Finance’s operating performance in last 2 years has been quite remarkable delivering the best return ratios in the industry. Any increase in funding costs may adversely impact NIMs and hence reduce the target multiple. „ We initiate coverage with a BUY rating on the stock. 266 reflecting an upside of 22% to CMP. „ The company has outperformed its parent company HDFC on parameters like return ratios and loan growth. „ We have valued the stock at 8x FY14E P/ABV which gives us the price target of Rs. 20 00704 20 00804 20 00904 20 01004 20 01104 M onthly Price Gruh Finance-12mth fwd P/B (x) 8 6 4 2 0 20 01204 20 01301 Risk Factors „ Any unfavorable change in policies such as cost of refinancing by NHB would adversely affect rural demand leading to rise in NPAs.Valuation and Risk Factors Gruh Finance. y trades at p premium valuation on account of best in „ The stock currently class NIMs. healthy margins and well managed asset quality.P/BV band 400 14x 300 200 100 2x 0 11x 8x 5x Valuation „ The stock trades at premium valuation of 8x FY13E and 6.3x FY14E P/ABV. Axis Securities. Jan-13 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 „ Sharp deterioration in asset quality „ Sharp slowdown in loan growth „ Regulatory developments which may enhance the competitive pressure in the housing finance market Gruh F inance Source: Company.

) j BV ( (Rs.Company Financials Profit & Loss Y/E March Interest Earned (A) Interest Expended Net Interest Income Non-Interest Income (B) . Cr) Net NPAs (%) Provisioning Coverage (%) Capital Others Operating Cost as % of Net Income 20 20 20 20 0.2 22 22 8 2.) ) Adj.1 9.0 100 0.Sale of Investments .0 0.9 7.1 31.6 5.0 0.2 34.5 4.1 5.6 13.5 27 27 (%) FY11 FY12 FY13E FY14E 9 2.7 9.0 0.Other income Net Total Income Total Income (A+B) Operating Expenses .0 100 0.0 13.) ROA ROE BV (Rs.2 33 33 Yields & Margins Average Yield on Advances Average Cost of Borrowing NIM 11.Staff Costs Operating Profit Profit including extraordinary income Provisions Profit after Provisions Tax PAT FY11 346 201 145 15 1 14 159 360 31 16 127 128 3 126 34 92 FY12 491 309 182 23 6 17 205 514 40 20 159 165 2 163 42 120 FY13E 647 434 213 27 6 21 240 674 47 25 187 193 6 187 52 135 (Rs cr) FY14E 812 548 264 32 6 27 296 844 59 31 232 238 9 229 64 165 Key Ratios Y/E March Valuations EPS (Rs.0 100 0.1 13.6 Asset Quality Net NPAs (Rs.4 18 18 7 3.0 100 Source: Company.0 0.9 31.5 8.0 4. Axis Capital 15 . 5 3.8 31.

177 12 9 3.222 FY13E 35 435 471 4.284 FY12 35 350 386 3.190 (Rs cr) FY14E 35 551 586 5. Axis Capital 25 33 28 29 6 26 32 29 28 -30 17 12 23 27 25 24 22 25 27 25 16 .485 FY11 35 283 318 2.077 12 12 4.064 13 12 5.222 70 31 5.966 3.190 70 38 6.284 97 24 4.899 6.485 Growth (%) Growth in NII Growth in Net profit Growth in borrowings Growth in advances Growth in investment Source: Company.…Company Financials Balance Shet Y/E March Capital Reserves and Surplus Networth Borrowings Total Liabilities A t Assets Cash with RBI and Call Money Investments Advances Fixed Assets Other Assets Total Assets 51 35 3.837 4.350 15 12 6.719 5.

29 Infantry Road. – 500 082 (+91-40) 3065 8501 Indore 320 City Centre. copied or distributed. The securities discussed and opinions expressed in this report may not be suitable for all investors.110001 (+91-11) 9818263885 Hyderabad 21 B Maheshwari Chambers 217 C Somajiguda. Sayajiganj. 815 81 & 816 816. do u e t The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The views and opinions expressed in this document may or may not match or may be contrary with the views. Mumbai. Road. Mumbai . without prior written consent. a a ty express e p e or o implied.axissecurities. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Copyright in this document vests exclusively with AXIS Securities Ltd *. 1717 .P. Ambadeep Building. availability or use would be contrary to law. a u a y completeness o plete e or o fairness fai e of the information i fo atio and a d opinions opi io contained o tai ed in i this thi document. who must make their own investment decisions. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval. Neither the Firm.com This document has been prepared by AXIS Securities Ltd * – Privileged Client Group. Office no 308. options and other derivatives as well as non investment grade securities ‐ involve substantial risk and are not suitable for all investors. y.452 001 (+91-0731) 3916601 Kolkata Om Towers. state. Near Galaxy Hotel. 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Persons) Canada. * The name of the company has changed to Axis Securities Limited in the records of Registrar of Companies. based on their own investment objectives. This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of AXIS Securities Ltd *. p . or solicit investment banking or other business from. regulation or which would subject AXIS Securities Ltd * to any registration or licensing requirement within such jurisdiction. thereof This report is not directed or intended for distribution to. Shivajinagar. 570. 32 Chowringhee Road Kolkata – 700 071 ( (+91-33) ) 4005 6201 Pune (Shivajinagar) 1248 A . Affiliates of AXIS Securities Ltd * focused on Institutional Equities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. rating and target price of the Affiliates research report. 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