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Gruh Finance: Slower start to FY16 - Views on News from Equitymaster
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Gruh Finance: Slower start to FY16
Jul 23, 2015

Gruh Finance announced its results for the first quarter of financial year 2015-16 (1QFY16). The institution grew its income from operations by 21.8% YoY and the profits by 20% YoY during 1QFY16. Here is the detailed analysis of the results.

Performance summary
  • Income from operations grew 21.8% YoY in 1QFY16 with a healthy 26% YoY growth in loan book. Consequently, the net interest income grew by 20% YoY.
  • Net interest margins remained stable at around 4.2% despite pressure on yields.
  • Net profit for FY15 increased by 20% YoY despite higher provisioning costs. Other expenses remained in control, with cost to income ratio at around 17%.
  • Gross NPAs have remained stable at 0.5% while the net NPA ratio moved up marginally to 0.15%.

Financial Performance Snapshot
Rs (m) 1QFY15 1QFY16 Change
Income from operations 2,416 2,943 21.8%
Interest Expense 1,549 1,902 22.8%
Net Interest Income 867 1,041 20.1%
Net interest margin (%)      
Other Income - -  
Other Expense 134 175 30.6%
Provisions and contingencies 118 118 0.0%
Profit before tax 615 748 21.6%
Tax 196 245 25.0%
Profit after tax/ (loss) 419 503 20.0%
Net profit margin (%) 17.3% 17.1%  
No. of shares (m)   363.5  
Book value per share (Rs)   21.0  
P/BV (x)*   11.3  
*Book value as on 30th June 2015

What has driven performance in 1QFY16?
  • Gruh Finance grew its loan book by 26% YoY in 1QFY16. The net interest income however grew at a slower pace due to pressure on yields. The NIMs may improve over time as Gruh's cost of funds is low. The entity 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, intense competition in the housing finance sector may not offer much upside.

  • The disbursements in 1QFY16 grew at 12% YoY in 1QFY16 on the back of 16% YoY growth in deposits. The slower growth in disbursements this quarter seems to be due to the housing finance company's conservative stance on credit quality.

  • With cost to income ratio at 17%, Gruh's 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. However, with over 30% YoY growth in operating expenses, the cost to income ratio has moved up from 15% to 17% over the past year.

  • While the gross NPAs marginally went up from 0.3% to 0.5%, the net NPAs were at 0.15% at the end of June 2015. 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 236, the stock is valued at 5.6 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 24% since then. We would recommend investors to wait to buy more of the stock closer to the best buy price.

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