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Gruh Finance: Quality in check - Views on News from Equitymaster
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Gruh Finance: Quality in check
Oct 20, 2015

Gruh Finance announced its results for the second quarter of financial year 2015-16 (2QFY16). The institution grew its income from operations by 21% YoY and the profits by 20.2% YoY during 2QFY16. Here is the detailed analysis of the results.

Performance summary
  • Income from operations grew 21.4% YoY in 1HFY16 with a healthy 16% YoY growth in loan book. Consequently, the net interest income grew by 22% YoY.
  • Net interest margins remained stable at around 4.4% despite pressure on yields.
  • Net profit for 1HFY16 increased by 20% YoY despite higher provisioning costs. Other expenses remained in control, with cost to income ratio at around 20%.
  • Gross NPAs have remained stable at 0.6% while the net NPA ratio moved up marginally to 0.2%.

Consolidated financial snapshot

(Rs m) 2QFY15 2QFY16 Change 1HFY15 1HFY16 Change
Income from operations 2,577 3,118 21.0% 4,993 6,062 21.4%
Interest Expense 1,664 1,987 19.4% 3,213 3,889 21.0%
Net Interest Income 913 1,131 23.9% 1,780 2,173 22.1%
Net interest margin (%)       4.3% 4.4%  
Other income            
Other Expense 200 257 28.1% 334 430 28.8%
Provisions and contingencies 41 71 75.4% 160 193 20.7%
Profit before tax 672 803 19.5% 1,287 1,551 20.5%
Tax 241 285 18.3% 437 530 21.3%
Profit after tax/(loss) 431 518 20.2% 850 1,021 20.1%
Net profit margin (%) 16.7% 16.6%   17.0% 16.8%  
No. of shares (m)         363.5  
Book value per share (Rs)         22.4  
P/BV (x)*         11.4  

*Book value as on 30th September 2015

What has driven performance in the quarter ended September 2015?
  • Despite healthy profits, Gruh Finance continued to remain conservative on the growth front in the first six months of FY16. Disbursements in 1HFY16 grew at 13.4% YoY on the back of 12% YoY growth in deposits. The slower growth in disbursements seems to be due to the housing finance company's conservative stance on credit quality.
  • Gruh Finance grew its loan book by 16% YoY in 1QFY16. The net interest income however grew at a faster pace due to improvement in yields. 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 the 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.
  • With cost to income ratio at 20%, 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 28% YoY growth in operating expenses, the cost to income ratio has moved up from 19% to 20% over the past year.
  • While the gross NPAs marginally went up from 0.4% to 0.6%, the net NPAs were at 0.2% 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 five 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 255, the stock is valued at 6.1 times our estimated FY18 adjusted book value.

While we have estimated Gruh to retain the average 25% YoY growth in loan book that it has clocked over last 5 years, the growth in the past few quarters have been slightly below expectations. Having said that, we expect the growth rate to pick up over time.

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 35% since then. We would recommend investors to wait to buy more of the stock closer to the best buy price.

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