Higher risk at expensive valuations

The company is a wholly-owned subsidiary of Repco Bank (76.8% owned by the government of India) and established in 2000

Repco Home Finance (Repco) is a Chennai-based home financier catering largely to the self-employed segment in southern India with most of its 68 branches across Tamil Nadu, Karnataka, Andhra Pradesh, Kerala and the Union Territory of Puducherry. The company is a wholly-owned subsidiary of Repco Bank (76.8 per cent owned by the government of India) and established in 2000. The company's initial public offering (IPO) to raise Rs 259-270 crore constitutes fresh issue of about 15.7 million shares in a price band of Rs 165-172 per share, which it plans to use to augment its capital base and for its future business growth.

Given Repco’s strong presence in Tier-II and Tier-III cities, Repco is well placed to act as a key player in the financial inclusion process and capture a larger pie of this under-penetrated market. In fact, a large part of its loan book qualifies for priority sector lending (PSL), which augurs well for Repco.

“In our view, NBFCs operating in PSL segments enjoy competitive advantages, as most banks (especially in the private sector) have a perennial shortage in meeting their PSL targets, creating favourable demand-supply dynamics for those NBFCs that can source higher-yielding PSL loans at reasonable asset quality,” note analysts at Angel Broking.

Apart from its vast experience in the business, according to the management, its USP lies in the fact that it follows a centralised loan approval mechanism, resulting in lower costs and faster turnaround of loans (about seven to eight working days). While the growth potential is huge, the flip side is that Repco's loan portfolio is concentrated in south Indian (98 per cent of the total) and focused largely on the self-employed, non-salaried borrowers (54 per cent of total loans). Both these factors expose the company to the risk of geographical concentration and asset quality.

While the focus on self-employed borrowers enables the company to achieve financial inclusion (as banks focus largely on salaried borrowers), it also increases the risk of delinquencies due to the irregular nature of their income. This fact is well reflected in Repco's net non-performing assets ratio, which has moved up from one per cent in FY12 to 1.6 per cent as on September 30, 2012. The management though believes that these slippages are short-term in nature and are recovered sooner than later.

Going forward, Repco will continue to focus on the self-employed category and plans to expand to other regions in the country. It has started branches in Maharashtra, Odisha, West Bengal and Gujarat to de-risk its business. Repco currently sources a little less than half of its funds from the National Housing Bank, which typically costs between seven and eight per cent and is among the cheapest sources of funding. While it also sources funds from other banks, Repco plans to diversify into low-cost sources of funds, such as public deposits and non-convertible debentures. But this could have a bearing on Repco’s net interest margin, which has been falling from a little over five per cent in FY10.

Replco’s loan book has expanded 44 per cent over FY08-12 to Rs 2,802 crore as on March 31, 2012 and net profit has grown at 45 per cent over the same period to Rs 68 crore. However, the latest available data for the first half of FY13 reveals that growth rates have slowed, which is despite the foray into newer geographies. In terms of gains for investors, the offer is not attractive.  “At the higher price band of Rs 172, Repco's annualised fully diluted FY13 price to book value ratio is about 1.65 times. This appears fair as compared to peers, which means there are unlikely to be any listing gains for investors,” says Silky Jain, analyst at Nirmal Bang Securities.

While valuations are lower than Gruh Finance, these are higher than peers such as Canfin Homes and GIC Housing Fin, which are trading at lower valuations of 0.86 times and 1.11 times FY13 estimated book values, respectively, despite relatively larger and geographically diversified loan book.

Canfin's and GIC's asset quality is also better. On a PE basis as well, the IPO appears expensive at 15 times FY13 annualised earnings as against 6.4 times and 6.8 times for Canfin Homes and GIC Housing, respectively.  Skip.

ISSUE DETAILS
Price (Rs )	165-172
Size (Rs  crore)	259-270
Opened on	13th Mar
Closes on	15th Mar

ASSET QUALITY KEY MONITORABLE	FY11	FY12	H1'FY13
Total Income (Rs Crore)	226	319	189
Net Interest Income (Rs Crore)	86.8	104	57.2
Net Interest Margin (%)	4.9	4.2	3.8
Profit after tax (Rs Crore)	57	68	36
Return on Assets (%)*	3.2	2.7	2.4
Net NPA (%)	1.0	1.0	1.6
Source: Company RHP, * Annualised figures