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Gruh Finance: Profits stable despite rise in provisions - Views on News from Equitymaster
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  • Apr 21, 2015 - Gruh Finance: Profits stable despite rise in provisions

Gruh Finance: Profits stable despite rise in provisions
Apr 21, 2015

Gruh Finance announced its results for the fourth quarter and financial year 2014-15 (FY15). The institution grew its income from operations by 25.4% YoY and the profits by 26.2% YoY during FY15. Here is the detailed analysis of the results.

Performance summary
  • Income from operations grew 25.4% YoY in FY14 with a healthy 27% YoY growth in loan book. Consequently, the net interest income grew by robust 26.7% YoY.
  • Net interest margins moved down from 4.4% in FY14 to 4.2% in FY15.
  • Net profit for FY15 increased by 26.2% YoY despite higher provisioning costs. Other expenses remained in control, with cost to income ratio at around 17%.
  • Gross NPAs have remained stable at 0.3% while the net NPA ratio is negligible.
  • The board approved dividend of Rs 2 per share for FY15 (dividend yield 0.8%).

Consolidated Financial Snapshot
Rs (m) 4QFY14 4QFY15 Change FY14 FY15 Change
Income from operations 2,544 3,049 19.9% 8,456 10,603 25.4%
Interest Expense 1,479 1,827 23.5% 5,436 6,777 24.7%
Net Interest Income 1,065 1,222 14.7% 3,020 3,826 26.7%
Net interest margin (%)       4.4% 4.2%  
Other Income - -   5 - -100.0%
Other Expense 130 168 29.8% 564 660 17.0%
Provisions and contingencies 3 6 70.6% 17 157 845.2%
Profit before tax 932 1,048 12.4% 2,444 3,009 23.1%
Tax 196 256 30.6% 675 777 15.1%
Profit after tax/ (loss) 736 792 7.6% 1,769 2,232 26.2%
Net profit margin (%) 28.9% 26.0%   20.9% 21.1%  
No. of shares (m)         401.0  
Book value per share (Rs)         19.3  
P/BV (x)*         12.5  
*Book value as on 31st March 2015

What has driven performance in FY15?
  • Gruh Finance grew its loan book by 27% YoY in FY15. 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 marginally came down to 0.3% the net NPAs remained NIL at the end of FY15. 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. However in compliance with regulatory requirement and in anticipation of rise in provision costs in future with the growth in loan book, the entity provided for a substantially higher amount in FY15.
What to expect?
At the current price of Rs 247, the stock is valued at 5.9 times our estimated FY18 adjusted book value.

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 gone up by 30% since then. We would recommend investors to wait to buy more of the stock closer to the best buy price.

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