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Gruh Finance: Growth with quality - Views on News from Equitymaster
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Gruh Finance: Growth with quality
Nov 25, 2014

Gruh Finance announced its results for the second quarter (2QFY15) of the financial year 2014-15. The institution grew its income from operations by 27% YoY and the profits by robust 37.7% YoY during 1HFY15. Here is the detailed analysis of the results.

Performance summary
  • Income from operations grew 27% YoY in 1HFY14 with a healthy 29% YoY growth in loan book. Consequently, the net interest income grew by robust 28.7% YoY.
  • Net interest margins moved down from 4.4% in 1HFY14 to 4.2% in 1HFY15.
  • Net profit for the half year increased by 37.7% YoY in 1HFY15 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 0.3% while the net NPA ratio is negligible.
  • The capital adequacy ratio of the entity stood comfortable above 15% as at the end of September 2014.

Financial Performance Snapshot
Rs (m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Income from operations 2,105 2,577 22.4% 3,931 4,993 27.0%
Interest Expense 1,389 1,664 19.8% 2,548 3,213 26.1%
Net Interest Income 716 913 27.5% 1,383 1,780 28.7%
Net interest margin (%)       4.4% 4.2%  
Other Income - -   6 - -100.0%
Other Expense 165 201 22.1% 292 334 14.4%
Provisions and contingencies 43 40 -7.8% 141 159 12.8%
Profit before tax 508 672 32.3% 956 1,287 34.6%
Tax 163 194 19.0% 274 348 27.0%
Profit after tax/ (loss) 345 478 38.6% 682 939 37.7%
Net profit margin (%) 16.4% 18.5%   17.3% 18.8%  
No. of shares (m)         363.1  
Book value per share (Rs)         19.3  
P/BV (x)*         12.6  
*Book value as on 30th September 2014

What has driven performance in 2QFY15?
  • Gruh Finance grew its loan book well above sector average in 1HFY15. 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. NHB refinance is typically given to promote rural lending and it cannot be availed if the loan amount exceeds a certain cap. So, as the proportion of NHB refinance decreases over a period of time cost of funds will rise in the future. This could hurt Gruh's net interest margins (NIMs), which have historically been above sector average.

  • The NBFC's unique focus on the underpenetrated segment of non-salaried borrowers continues to place the company on the surer footing.

  • 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 kep its operating costs in leash.

  • 2QFY15 witnessed improvement in asset quality with gross NPAs remaining stable while 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. Gruh being a conservative lender would therefore need to raise its NPA provision and in the process compromise on profit margins.
What to expect?
At the current price of Rs 244, the stock is valued at 5.8 times our estimated FY18 adjusted book value.

Since the Megatrend is still in its early years, the companies within it will also be in the early stages of their life-cycles. As a result, most of these would be taking off from a lower base and thus growing both their topline as well as bottomline at a fast pace. In fact, even if we end up recommending some large companies, the opportunity before them is going to be so huge that they would still qualify as growth stocks. 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 32% since then. We would recommend investors to wait before buying more of the stock at relatively attractive valuations.

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