Repco Home Finance

Why looking at this company now?

Stock price
900
854

800 769 782

700

600

500
442

400
333
300

200
170
117 110
100
92

0
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Why looking at this company now?
• Stock price has fallen from highs of INR 850 in Aug 2016 to lifetime lows of 110 in June 2020 (listed at INR
170 in April 2013)
• Price has been on a downward trend for the last 4 years. The reasons attributed are demonetization,
introduction of GST, bankruptcy of NBFCs i.e. ILFS, DHFL and finally COVID-19 crisis
• It is also pertinent to note that P/B peaked at 5.5x in Aug 2016 and is currently at 0.5x. Value is function of
return on capital and growth – (i) ROE has averaged 16.5% since listing, with highest witnessed of 17.5% in
Mar 17 and latest at 20.2% in 9m Mar 20 (ii) Assets have grown at 19% CAGR in the last 5 years, however
growth has slowed in the last 3 years at only 13% CAGR. Thus we could say that lower growth may also
have resulted in correction in valuations
• We need to figure if the current valuations are (i) oversold and market is fearing the worst due to
uncertainty in the future or (ii) fair and 3 year secular trend of falling prices is pointing towards permanent
deterioration in business economics or (iii) high and future will be worse than market expectations
• We shall be reverse calculating ROE and growth based on current market price to understand market
assumptions on business economics and figure out if its very bleak or rosy and its implicit implications on
the housing finance industry and economy as a whole
• Our hypothesis is that valuations are oversold – upfront admission of bias. We shall objectively look at
different scenarios to try to disprove the hypothesis (proving is easier since the biased mind is always on
the look out for confirmation of selective facts)
Who is selling?
• Let us have look at the share holding pattern over the last few years:
 (%) Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Promoter 37 37 37 37 37 37 37

MF 10 15 19 24 24 25 24

FII 7 29 28 24 23 23 29

Others 46 18 16 15 16 15 10

• Promoter stake has remained constant at 37% over the last 6 years. Mutual Funds and FIIs had increased their
stakes significantly which led to prices peaking in Aug 2016. FIIs have subsequently reduced their stake which may
have led to price decline in the last 3 years
• However as on Mar’20, Mutual Funds and FIIs have maintained their stakes compared to previous years and
doesn’t explain who is selling
• Further the company has never pledged its shares which rules out any forced selling by banks or financial
institutions
• MFs – Franklin India Opportunities Fund, HDFC Smallcap Fund, DSP Smallcap fund, ICICI Pru Smallcap Fund
• FII – India Capital Fund, Parvest Equity India, Fidelity Fund, Somerset Emerging Markets Smallcap Fund, Apax Global
Alpha Ltd
Who is selling?
• Let us have look at the volumes:
Volume (lakhs)
45
40
35
30
25
20
15
10
5
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r-1 l-1 t-1 n-1 r-1 l-1 t-1 n-1 r-1 l-1 t-1 n-1 r-1 l-1 t-1 n-1 r-1 l-1 t-1 n-1 r-1 l-1 t-1 n-1 r-1 l-1 t-1 n-2 r-2
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• There doesn’t seem to be any drastic decline in volumes, apart from a

spurt every few months
• Before Aug 2016, the monthly average volume was 6.4 lakhs and post
that average volume was 5.8 lakhs
• Thus we can rule out low volumes as reason for sharp fall in price
Background
• Repco Home Finance Ltd (RHFL) is a housing finance company head
quartered in Chennai, Tamil Nadu. It was incorporated in 2000 under the
umbrella of Repco Bank, which is a cooperative society under the
administrative control of Ministry of Home Affairs, Govt of India
• Repco Bank was constituted for the purpose of promoting the rehabilitation
activities for repatriates from neighbouring countries mainly from Sri Lanka
and Burma. Govt of India is the largest shareholder with 49% followed by TN,
AP, Telangana, Kerala and Karnataka
• RHFL provides loans to small salaried customers employed with MSMEs and
SMEs and unsalaried/ self employed customers running MSMEs, small shops
and the like with aspirations to own a house in Tier 2, Tier 3 and Tier 4 towns
• As on Dec 30 2019, the company has 176 points of presence comprising of
149 branches and 27 satellite centers; presence in 12 states and a union
territory. The retail network is spread across states of Tamil Nadu, Karnataka,
Andhra Pradesh, Telangana, Kerala, Maharashtra, Odisha, West Bengal,
Gujarat, Madhya Pradesh, Jharkhand and the Union Territory of Puducherry
Business Profile
• The company provides housing loans and loan against property to people at bottom of the income pyramid.
Their target segment is small salaried employees of MSMEs and self employed people running MSMEs
located in tier 2/3/4 towns
• Since inception, the company has focused on the bottom income pyramid and developed significant
underwriting experience over the last 2 decades. The current focus by the government on affordable housing
is expected to provide further tailwinds to the company
• As of 2019, TN accounted for majority of the business (57%), followed by AP, Karnataka, Puducherry and
Kerala. If we compare to 2008, TN accounted for 75% of the business
• The large MSME clusters in southern and western India are present in AP (32), Karnataka (19), Kerala (10), TN
(28) Gujarat (49) and Maharashtra (58). The company is present in all of these states with 13 branches in AP,
19 in Karnataka, 6 in Kerala, 73 in TN, 6 in Gujarat and 17 in Maharashtra. Apart from TN, there is scope for
expansion in other states
• The 2 main segments are housing loans and loan against property. As on Dec 2019, housing loan accounted
for 81% of loan book and LAP accounted for 19% of loan book. This proportion has more or less remained
the same in the last 10 years. For instance in 2008, housing loan account for 84% of loan book and LAP
accounted for 16% of loan book
• The company traditionally had a higher focus on self employed/ non salaried segment. In the last few years,
it has ramped up loans to salaried segment to better align risk of the loan book. As of Dec 2019, self
employed segment accounted for 53% of the loan book and salaried segment accounted for 47%. This has
come down from a proportion of 60:40 in 2013
• The company has not lent to wholesale developers or real estate projects in the last decade. It has stuck to
its niche segment of MSME employees and owners
Housing Finance industry
• The largest players are HDFC, LIC Housing Finance, Indiabulls HF Dewan Housing Finance, HUDCO and PNB HF
• The smaller players are Gruh Finance (part of Bandhan Bank now), Canfin Homes, GIC HF, Repco HF and Aavas
Financiers
• The industry can be bifurcated based on target customers – wholesale developers, salaried customers working
with large organisations, salaried customers belonging to MIG/LIG (6-18 lakhs p.a.), salaried customers
belonging to EWS (<6 lakhs p.a.) and self employed customers
• The “creamiest” customers are the salaried customers working in large organisations based out of metros. Due
to job security, they are considered very safe and have a loan size of 50 lakhs or more. These customers are rate
sensitive and catered to mainly by large banks and HDFC
• The next sought after segment used to be the developer segment which offered attractive yields and high churn
rate. However, real estate has been in doldrums for the last few years and lenders are on course to reduce
exposure – Dewan HF, Indiabulls HF, PNB HF, LIC HF
• The MIG and LIG salaried segment is where most of the HFC players compete. The ticket size is INR 20-30 lakhs
and the jobs are relatively secure. These customers are located across metros and tier 1/2 cities – LIC HF, Canfin
homes, GIC HF
• The riskiest segments are the EWS and self employed group, located across tier 2/3/4 towns. These segments
are most vulnerable to swings in the economy and are disproportionately affected by even a slight blip in
external environment. Income is irregular and unpredictable and limited savings gives little buffer – Gruh,
Repco, Aavas
Industry Structure – Porter’s 5 forces
• Entry barriers: Low. For a new entrant, the net worth requirement is just INR 10 crs. There have been several new
players in the last few years, especially by NBFCs in different segments. Some egs would be Bajaj Finance,
Manappuram Finance, Muthoot Finance, Shriram group, Aavas financiers. Going forward, intensity of entry may be
subdued given the slowdown in demand for housing due to COVID-19
• Competitive intensity – High. Over the last few years, competitive intensity has become severe due to entry of new
players as well as increased focus by banks on account of stress and slowdown in corporate book. Competitive
intensity is highest in the salaried segment, especially in ticket size more than 50 lakhs. On the other hand,
competitive intensity is much lower in lower ticket size self employed segment
• Bargaining power of suppliers – High. The suppliers are money markets, banks and retail customers. The bargaining
power of suppliers is only visible during the tough times which in case of banks/money markets would be cyclical
downturns or other external liquidity shocks. Banks typically lend on a variable basis and increase in rates are
passed on with a lag. Money markets dry up overnight and HFCs will find it very challenging to roll over any money
market instruments
• Bargaining power of customers – Moderate. Bargaining power of customers is highest in the salaried segments of
moderate to high ticket size and low risk. In the last few years, due to stress in corporate book, banks as well as
NBFCs have lent aggressively to the salaried as well as LAP segment which has led to lower rates, lax credit
standards and high loan to value. On the other hand, the small salaried and self employed segment have much
lower bargaining power since moneylenders are the only substitute for credit at much higher rates
• Substitute – High. Banks, NBFCs and even fintech companies provide housing as well as LAP loans
 Industry Economics – Large players
  HDFC Indiabulls HF LIC HF Dewan HF PNB HF

HL 58% Retail LAP 20%

HL:76%, Cons Fin 11%, Housing 66% Non HL 77% Retail LAP 16% HL 57% LAP 21% Project Cons Fin 12% Deve 4%
Segments LRD 8%, Corp 5% housing 34% Deve 7% 17% SME 5% Others 6%
  Mar 14-19 FY20 Mar 14-19 9m FY20 Mar 14-19 9m FY20 Mar 14-19 9m FY20 Mar 14-19 FY 20
Advances (crs) 4,06,607 4,62,600 120525 78253 1,94,646 2,05,962 97,976   74,023 67,571
Gross yield 10.9 10.1 12.7 10.9 10.2 9.7 11.7   11.1 10.9
COB 8.5 7.9 9.1 9.5 8.7 8.3 9.8   8.7 8.4
Spread 2.4 2.2 3.6 1.4 1.4 1.4 1.8   2.4 2.4
NIM 3.1 2.8 4.5 3.0 2.4 2.4 1.9   2.8 2.6
Other income 1.5 3.8 2.1 1.6 0.2 0.1 1.6   1.0 1.1
Total oth ex 0.4 0.4 0.5 0.9 0.4 0.3 1.0   1.1 0.8
Pre prov PBT 4.2 6.2 6.2 3.6 2.2 2.2 2.4   2.8 2.9
prov 0.3 1.4 0.8 0.7 0.1 0.6 0.9   0.4 1.8
PBT 3.9 4.8 5.4 3.0 2.0 1.6 1.5   2.4 1.2
Tax 1.1 0.6 1.1 0.5 0.6 0.3 0.5   0.8 0.2
ROA 2.9 4.2 4.3 2.4 1.4 1.3 1.0   1.7 1.0
Leverage 6.8 5.2 7.4 8.5 12.7 15.5 10.8   9.9 9.5
ROE 19.6 21.7 31.7 15.5 17.9 15.4 10.5   15.5 9.2
GNPA 1.2 1.4 0.9 1.9 1.5 2.7 2.7   0.5 2.8
NNPA 0.8   0.7   1.1   2.1   0.4 1.8
Prov cover 29%   22%   30%   22%   21% 36%
Industry Economics – Large players
• The top 5 players are HDFC, LIC HF, Indiabulls HF, Dewan HF and PNB HF. They are each present in different
segments. Let us see the impact of industry structure on the economics of each player
• Intuitively, developer and project loans will have the highest yield, followed by LAP and housing loans. Thus we can
see that Indiabulls, Dewan and PNB HF have the highest 5 yr avg yields at 12.7%, 11.7% and 11.1% respectively. LIC
HF has the lowest yield at 10.2% due to highest proportion of retail in loan book (93%)
• On the other hand, cost of borrowing is a function of size, parentage, loan book risk and diversification.
Consequently HDFC and LIC HF have the lowest 5 yr avg borrowing costs at 8.5% and 8.7% respectively
• Operating expenses is a function of scale. HDFC and LIC HF being the largest have very low other expenses at 0.4%
each respectively. Dewan HF and PNB HF incurred more than 60 bps of operating expenses due to smaller size
• Credit cost is the most critical parameter for a financial institution due to the inherently high leverage profile.
Hence it is often underreported by management and it becomes challenging to assess the risk levels of loan book
until the eventual blow up. Further, credit costs are cyclical and can increase drastically in case of deterioration in
economic outlook. Thus it needs to be seen over a cycle
 Housing loans to salaried segment in MIG group and above are the most resistant to economic shocks and is
evidenced by provisioning costs of HDFC and LIC HF at 0.3 and 0.1% respectively.
 The remaining three have a large non housing portfolio and credit costs are much higher and volatile.
Developer loans especially are prone to rapid credit costs on account of illiquid asset, high ticket size and
governance issues. Dewan HF is a prime eg of mis governance. Indiabulls HF has suspiciously low credit costs
and PNB HF is at risk once the loan book is seasoned
Industry Economics – Large players
• Average 5 yr ROA is highest for Indiabulls HF. However in this case, average may not be a good indicator due to
inaccurate lower credit costs during boom times. HDFC HF has the next best average ROA of 2.9%, follower by PNB
HF and LIC HF. HDFC has relatively higher ROA compared to others due to higher other income on account of
dividend from its subsidiaries, which are very large
• Leverage is a function of parentage, credit costs and track record. LIC HF has highest leverage of 13x due to
parentage of LIC. While the loan book profile is similar to that of HDFC, HDFC has the lowest leverage of 7x. PNB
HF has a high leverage of 10x vis-à-vis loan book risk profile but has support of parent entity. Only Indiabulls HF
with a leverage of 7.5x doesn’t have a strong backing
• ROE flows from ROA and leverage. Indiabulls HF has the highest avg ROE of 32% which is suspect. HDFC has the
best in class ROE of 20% that too with much lower leverage
• It is clear that the business model of a HFC flows from the customer segment and housing loan to salaried segment
are the safest segment under most scenarios. LAP segment has witnessed severe competition in the last few years
which has resulted in lower yield vis-à-vis risk and poor underwriting. Developer segment too has witnessed
aggressive lending due to reaching for high yields
 Industry Economics – Small players
  Gruh Canfin Homes GIC HF Repco HF Aavas Financiers
HL:83% LAP 12% Constrn
Segments Fin 5% HL 90% LAP 10% HL 88% LAP 12% HL 81% LAP 19% HL 74% LAP 26%
40% SE 60% salaried 70% salaried 30% SE 70% salaried 30% SE 54% SE 46% salaried 65% SE 35% salaried
  Mar 14-19 FY20 Mar 14-19 9m FY20 Mar 14-19 9m FY20 Mar 14-19 9m FY20 Mar 14-19 FY 20
Advances (crs) 17,408   16,886 20,708 12,747 12,795 11,036 11,625 4,724  
Gross yield 12.1  10.8 10.3 11.5 9.7 12.1  11.8 14.7  
COB 8.6  8.7 7.6 8.9 8.2 9.0  8.6 9.7  
Spread 3.4  2.1 2.7 2.6 1.6 3.1  3.1 5.0  
NIM 4.1  3.1 3.5 3.6 2.3 4.5 4.5 7.3  
Other income 0.6  0.3 0.1 0.2 0.1 0.3   2.5  
Total oth ex 0.8  0.7 0.6 0.8 0.3 0.9 0.9 4.4  
Pre prov PBT 3.9  2.8 3.0 2.9 0.4 3.9   5.4  
prov 0.1  0.2 0.3 0.4 0.7 0.5   0.3  
PBT 3.8  2.6 2.6 2.6 1.6 3.4   5.1  
Tax 1.1  0.9 0.7 0.8 0.9 1.1   1.7  
ROA 2.6  1.7 1.9 1.8 0.7 2.3 2.7 3.4  
Leverage 11.5  11.4 9.9 9.9 0.5 7.3 7.5 2.6  
ROE 30.2  19.3 19.1 17.5 0.2 16.6 20.2 9.1  
GNPA 0.66  0.6 0.8 2.8 3.0  4.2 0.3  
NNPA 0.35  0.4 0.5 0.6 1.4   0.2  
Prov cover 47%   33% 29% 79%   53%   29%  
Industry Economics – Smaller players
• The main difference between the larger and smaller players is segment in which they operate. The smaller players
operate in a niche, catering to salaried and self employed borrowers in a tier 1/2/3 cities in a particular region
• Apart from Canfin, all the players have a yield of 11.5% and more. This implicitly implies a riskier segment
compared to larger players. Canfin historically has lent to LIG/MIG group in metros which is the reason for lower
yields
• Cost of borrowing is only 20-50 bps higher than the larger players. Apart from Aavas, all have a parentage in the
form of banks or insurance
• Operating expenses is a function of scale and higher by 50-60 bps as compared to larger players
• Credit costs should intuitively be higher for the smaller players, however on average, its higher by 40-50 bps.
 Repco HF has the highest NPAs and consequently highest average provision costs since majority of the loan book is towards
self employed segment. Further, Repco has always been present in the LAP segment and thus witnessed a complete cycle of
NPAs in the LAP segment too
 Gruh had average provision costs of just 0.1% which is lower than HDFC too mainly due to HDFC’s presence in developer
segment. However Gruh’s recent entry in the LAP segment, that too at peak competitive intensity, is expected to result in
spike in credit costs in the future
 Canfin and GIC HF been primarily HL players and have recently entered the self employed and LAP segment. Thus while
historical provisioning costs are low, it may elevate going forward
• The leverage levels are higher than the likes of HDFC and similar to LIC HF. Gruh and Canfin homes have
leverages of 11.5x which is high. Repco has the lowest leverage of 7.3x, which is still higher than HDFC
• Gruh has the highest ROE at 30% while the others have ROEs ranging from 15-18%
Industry – Valuations driven by credit costs
  HDFC Indiabulls HF LIC HF Dewan HF PNB HF
  5 yr avg Current 5 yr avg Current 5 yr avg Current 5 yr avg Current 5 yr avg Current
prov 0.3 1.4 0.8 0.7 0.1 0.6 0.9   0.4 1.8
ROE 19.6 21.7 31.7 15.5 17.9 15.4 10.5   15.5 9.2
P/B 5.38 2.54 2.99 0.39 2.38 0.83 1.28 0.56 2.92 0.44

  Gruh Canfin Homes GIC HF Repco HF Aavas Financiers

  5 yr avg Current 5 yr avg Current 5 yr avg Current 5 yr avg Current 5 yr avg Current
prov 0.1   0.2 0.3 0.4 0.7 0.5   0.3  
ROE 30.2   19.3 19.1 17.5 0.2 16.6 20.2 9.1  
P/B 12.01   3.56 2.17 1.79 0.41 3.43 0.45   4.77

• The last 5 years witnessed a bull run in NBFCs especially HFCs and is evidenced by very high unsustainable P/B
ratios. PNB HF and Aavas financiers were listed recently at the time of the bull run
• Gruh Finance commanded the highest valuation average of 12x due to high ROE as well as very low credit costs.
Indiabulls despite having similar ROE had much lower P/B of 3x due to higher credit costs
• The current COVID-19 crisis has decimated the valuations of most HFCs. Companies with high exposure to
developers have been penalized severely as seen by valuations of Indaibulls and PNB
• Entities with high exposure to self employed and LAP segments have also been penalized – LIC HF and Repco
• HDFC and Canfin homes have been relatively spared due to their high proportion of home loans to salaried
segment in MIG gorup
Industry Summary
• Housing finance companies have had a very good run in the last decade mainly due absence of any serious
economic and liquidity issues in the external environment – all have recorded 15%+ ROE
• The affordable housing push by the government provided a further tailwind to the industry
• Markets had rewarded the industry with high valuations based on perceived stability, low risk and secular
growth potential
• However the valuations had run up to unsustainable levels and factored in a smooth future with no space for
cyclical downturn
• Over the last 2 years, events like demonetization and GST, bankruptcy of ILFS, have brought to the fore the
inherent fragility in business model of NBFCs. Further aggressive lending in affordable housing space has
raised concerns regarding “sub prime” nature of these loans
• The asset side has not witnessed any major issues and has ridden through all the above events. The
economic slowdown was expected to put pressure on developer and self employed segments, however the
slippages were not expected to be severe and similar to what has seen in previous down cycles
• The current COVID-19 crisis is an extreme event and may result in much higher slippages across all segments.
Even the salaried segment may not be spared due to job losses expected in the medium term
• However, the pessimism is oversold driven by the uncertainty in the medium term. The players with strong
business model will survive and demand for housing will mean revert. While banks will dominate the larger
salaried segment, players in niche segment should revert
 Repco Home Financial Performance
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19
Gross yield 12.0 12.0 12.5 12.4 12.4 12.2 11.5 11.1
COB 10.0 9.6 9.3 9.6 9.4 9.2 8.3 8.3
Spread 2.0 2.4 3.1 2.8 3.0 3.0 3.3 2.9
NIM 4.0 3.7 4.5 4.3 4.4 4.4 4.6 4.3

Other income 0.7 0.6 0.6 0.6 0.4 0.4 0.3 0.3
Emply 0.4 0.4 0.5 0.6 0.6 0.5 0.5 0.6
Other ex 0.4 0.3 0.4 0.4 0.3 0.3 0.3 0.4
Total oth ex 0.8 0.8 0.9 1.0 0.9 0.8 0.8 0.9

Pre prov PBT 3.9 3.6 4.2 3.9 3.9 4.0 4.1 3.6
prov 0.6 0.3 0.6 0.4 0.6 0.6 0.8 0.2
PBT 3.3 3.3 3.6 3.5 3.4 3.4 3.3 3.4
Tax 0.8 0.8 1.0 1.2 1.2 1.2 1.1 1.2
ROA 2.4 2.5 2.7 2.3 2.2 2.2 2.1 2.2
Leverage 9.2 6.9 6.0 6.9 7.8 7.9 7.7 7.4
ROE 22.5 17.0 16.1 15.9 17.0 17.4 16.4 16.5
GNPA 1.3 1.5 1.5 1.3 1.3 2.6 2.9 3.0
NNPA 0.9 1.0 0.7 0.5 0.5 1.4 1.3 1.4
Prov cov 30% 33% 51% 62% 63% 47% 55% 53%

• Performance has been stable over the last 8 years. NPAs have risen since 2017 due to economic slowdown and
events like demon, GST
• Loan book growth has slowed over the past 3 years due to aggressive lending by banks in retail space
• While GNPA is high, company claims to have cumulatively written down less than 30 crs of book since inception
Long term business performance
• RHFL has been in operation for 20 years and has witnessed several business cycles – loan book is seasoned,
business model tested over time
• It has recorded consistent ROE of 15%+ over the last decade, amidst various business events and cycles
• This ROE is backed by one of the lowest leverage levels across the industry
• RHFL has remained consistent in its strategy of lending to small salaried/ self employed customers since
inception. It has never deviated from its core business model to developer finance/ project finance like its
peers
• RHFL derives ~85% of its liability from banks. This is
• While lots of players are are aggressively expanding in the current fad i.e. affordable housing, RHFL has been
present for 2 decades and developed specialized underwriting skills required for the segment
• Competitive intensity is going to get more severe due to banks. However, RHFL’s ability to appraise small
income and self employed customers will enable it to dominate its niche and grow
• The company has withered several low probability headwinds successively in the last few years and is well
positioned to capitalize on the low term potential of housing
• The main question is can it survive the current crisis?
Valuation scenarios
• The market is currently valuing the company at 0.4 times book which implies a perpetual ROE of 6% and no
growth in future
• Scenario 1: NPA increases by 5% with 50% provisioning, and leverage of 7x leads to ROE of 11% in the first 1-
2 years followed by say ROE of 12%. Valuation comes to Rs 1,676 crs as compared to marketcap of Rs 800 crs.
Probability of 20%
• Scenario 2: NPA increases by 10% with 25% provisioning and leverage of 5x leads to ROE of 5% in fy21
followed by say ROE of 10% in fy 22 and reversion to 12% in fy23 leads to valuation of 1,500 crs as compared
to marketcap of Rs 800 crs. Probability of 40%
• Scenario 3: NPA increases by 10% with 50% provisioning and leverage of 5x leads to ROE of -7% in fy21
followed by 5% in fy22, 10% in fy 23 and reversion to 12% leads to valuation of Rs 1,200 crs compared to
marketcap of 800 crs. Probability of 10%
• Scenario 4: NPA increases by 5% with 25% provisioning, and leverage of 7x leads to ROE of 11% in the first 1-
2 years followed by say reversion of ROE to 15% and terminal growth of 5% leads to valuation of 2,186 crs
compared to to marketcap of Rs 800 crs. Probability of 20%
• Even in the worst case scenario of 13% NPAs, the company will survive. If the NPAs across the sector reach
such high levels, there will be systemic issues and may require intervention from the regulator
Conclusion
• RHFL’s business model is a difficult one to replicate or disrupt due to (i) day to day
engagement with small customers (ii) physical collection since most are unbanked (iii)
sourcing and training of talent in far away towns (iv) lack of CIBIL scores and irregular
undocumented income (v) lack of scalability
• At the same time there are several vulnerabilities which increases fragility of the model –
(i) economic shocks (ii) regulatory changes like tax gst etc (iii) compliance changes (iv)
one times events like COVID-19 etc. We have seen this playing out over the last few years
• The best business model is one whose success depends on very few independent
variables
• Thus we are looking at Repco Home only as a short term mean reversion of valuations
and not as a long term moated business bet due to difficulty in scalability and inherent
fragilities
• Once the valuation reverts to 1-1.2x book, we shall look at exiting