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Gruh Finance: Above average growth - Views on News from Equitymaster
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Gruh Finance: Above average growth
Feb 9, 2015

Gruh Finance announced its results for the third quarter and first nine months of the financial year 2014-15 (9mFY15). The institution grew its income from operations by 26.2% YoY and the profits by 25.6% YoY during 9mFY15. Here is the detailed analysis of the results.

Performance summary
  • Income from operations grew 26% YoY in 9mFY14 with a healthy 28% YoY growth in loan book. Consequently, the net interest income grew by robust 28.3% YoY.
  • Net interest margins moved down from 4.4% in 9mFY14 to 4.2% in 9mFY15.
  • Net profit for the first nine months increased by 25.6% YoY on account of higher net interest income and lower provisioning costs. Other expenses too remained in control, with cost to income ratio at around 19%.
  • Gross NPAs have remained stable at 0.5% while the net NPA ratio is negligible.
  • The capital adequacy ratio of the entity stood comfortable above 15% as at the end of December 2014.

Rs (m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Income from operations 2,173 2,711 24.8% 6,104 7,704 26.2%
Interest Expense 1,408 1,736 23.3% 3,957 4,949 25.1%
Net Interest Income 765 975 27.5% 2,147 2,755 28.3%
Net interest margin (%)       4.4% 4.2%  
Other Income - -   5 - -100.0%
Other Expense 141 157 11.3% 431 491 13.8%
Provisions and contingencies 68 146 115.2% 209 305 46.1%
Profit before tax 556 672 20.9% 1,512 1,959 29.6%
Tax 205 225 9.9% 479 662 38.2%
Profit after tax/ (loss) 352 447 27.3% 1,033 1,297 25.6%
Net profit margin (%) 16.2% 16.5%   16.9% 16.8%  
No. of shares (m)         363.1  
Book value per share (Rs)         18.8  
P/BV (x)*         13.9  
*Book value as on 30th December 2014

What has driven performance in 3QFY15?
  • Gruh Finance grew its loan book by 28% YoY in 9mFY15. The NIMs may however continue to remain under pressure. Gruh's cost of funds are low since it typically lends to rural people and gets financing at competitive rates from NHB. However, as the ticket size of its loan portfolio grows and it explores semi-urban areas for higher growth, the proportion of NHB refinancing may come down. While we expect Gruh's net interest margins (NIMs), to remain above sector average, fall in borrowing rates may not offer much upside.

  • The NBFC's unique focus on the underpenetrated segment of non-salaried borrowers has helped it grow the loan well above sector average.

  • The operating expenses continue to remain on the lower side even as the company intends to expand its network and asset base. In line with the business model of parent HDFC, Gruh has kept its operating costs in leash.

  • While the gross NPAs remained stable in 9mFY15, the net NPAs have marginally come down. Thanks to the impeccable quality of lending, Gruh Finance's NPA provision costs have been less than 0.3% of the loan book over the past 5 years. We do not see the ratio going up in the coming years as well. However, any stress on the rural economy that hurts the household income level could raise the chances of NPAs.
What to expect?
At the current price of Rs 260, the stock is valued at 6.2 times our estimated FY18 adjusted book value.

As we have said in the past, companies that qualify for the Megatrend opportunity will see a meaningful improvement in their fundamentals over a period of time. It is encouraging to see that Gruh Finance is managing to achieve above average loan growth along with quality of earnings and assets. We had recommended investors to invest around 25% of the amount they intended to invest in the stock, when we recommended it in October 2014. The stock has already gone up by 35% since then. We would recommend investors to wait before buying more of the stock at relatively attractive valuations.

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