Apr 18, 2017 04:10 PM IST | Source:

Is Gruh Finance an unaffordable play on affordable housing?

All the more reason to whip up some interest and try and understand the company; also, it operates right at the heart of rural India and to understand Gruh is to understand what is happening in that market.

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Gruh Finance's results don't usually  grab much attention because of the company’s consistent performance. Coming from the stable of HDFC (58.55 percent owner), the predictability of its numbers makes it at times almost boring.

All the more reason to whip up some interest and try and understand the company; also, it operates right at the heart of rural India and to understand Gruh is to understand what is happening in that market.

The broad numbers were consistent as ever. After-tax-profit for Q4 FY17 at Rs 110.5 crore grew by 26 percent aided by 22 percent growth in net interest income (the difference between interest income and expense), modest rise in expenses and a steep fall in provisions.


Margins were stable year-on-year at 5.75 percent, driven by 70-80 basis points reduction in both yields and cost of funds. Gruh has rarely disappointed on asset quality and this time was no different. Gross NPA was stable at 0.31 percent and net NPA was nil (0.09 percent in Q4 FY16).

The figure that gave us a lot of comfort from Gruh’s earnings was the growth in disbursement. In the previous quarter, disbursements at Rs 925 crore were down. It was reassuring to see disbursement at Rs 1,255 crore – showing year-on-year growth of 16 percent and sequential growth of 36 percent. Loan growth, too, grew by a respectable 19 percent. Being the first full quarter post demonetisation, the numbers should allay fears of critics who were apprehending lingering stress in rural India on account of demonetisation.

But the moot question for investors remains: Albeit the pristine quality can it still justify the valuation at 10.6X FY18 book?

While we admit that there is certainly no room for any multiple re-rating, we are reasonably confident of the company maintaining 20 percent kind of earnings trajectory. For risk-averse investors looking at high quality businesses with decent earnings growth, a predictable high teen equity return might be worth exploring.

A lot on the macro front has changed for this company and it will remain a key beneficiary of government’s agenda of “Housing for All by 2022” and the recent sops announced for affordable housing.

There have been numerous regulatory provisions for Housing Finance companies. Notable amongst them are:
•    Reduction in risk weights from 50 percent to 35 percent for loans with loan to value ratio of less than 80 percent.
•    Spread cap on NHB’s (National Housing Bank) Rural Housing Fund (RHF) scheme increased from 2.0 percent  to 3.5 percent.
•    100 percent deduction in profits for entities undertaking housing projects for flats up to 30 square metres in four metro cities and 60 square metres in other cities
•    Refinance target of HHB increased to Rs 200 billion in FY18 from Rs 170 billion in FY17
•    Specific limit for mutual fund’s investment in the debt of Housing Finance Companies increased from 10 percent to 15 percent.
•    Infrastructure status accorded to affordable housing

In addition, the recent interest subsidy scheme for the middle income household should go a long way in making affordable housing really affordable for common Indians.

Middle income groups with annual incomes above Rs 6 lakh and up to Rs 18 lakh per year are eligible for interest subsidy on housing loans under the new CLSS(MIG).

As against the initial scheme which provided loans of up to Rs 6 lakh at a subsidised rate of 6.5 percent, housing loans of up to Rs 9 lakh and Rs 12 lakh will now get interest subvention of 4 percent and 3 percent, respectively. With an average ticket size of less than Rs 10 lakhs, almost the entire customer base of Gruh will be beneficiary of the interest subvention scheme.

Although the rather hallowed valuation makes the investor cautious, the stock has unique moats that makes it a compelling idea to look at for the medium-term. The stock hasn’t participated in the recent rally in the markets although it has risen by 43 percent in the past one year. With markets staring at multiple headwinds in the near-term, investors should keep their eye on high quality names like Gruh Finance for an opportunity to accumulate.
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