Gruh Finance: BUY. Gruh Finance: Home in on this niche player

Home loans are set to get cheaper with the steep cut in the repo rate by the RBI last week. But more than a reduction in loan rates, which can only increase affordability to some extent, it is the RBI’s proposal to reduce risk weights applicable to lower-value but well collateralised housing loans that have brought cheer to players, such as Gruh Finance. A subsidiary of Housing Development Finance Corporation (HDFC), Gruh Finance is one of the pioneers in the rural housing finance segment, providing small-ticket home loans to low-income groups in semi-urban and rural areas.

The RBI’s move will give a fillip to the government’s thrust on the affordable housing segment via its ‘Housing for all by 2022’ scheme. While the details are yet to be finalised, housing finance companies, such as Gruh Finance, that operate in the small-ticket-size segment will be key beneficiaries of this measure.

The stock now trades at a pricey 10.5 times one-year forward book, double that of Repco Home Finance. But the Gruh Finance stock has always commanded a substantial premium over peers, thanks to its consistent operational performance, strong parentage of HDFC, robust returns and good asset quality. While there are concerns over fall in real estate prices eroding the value of lenders’ loan portfolios, it is unlikely to have a major impact on low-ticket players, such as Gruh Finance, whose average loan size is under ₹10 lakh.

The company has reported an annual profit growth of 29 per cent over the last decade, and 20 per cent in the latest June quarter. With 20-25 per cent expected growth in earnings over the next two to three years, investors with a long-term horizon can still buy the stock at current levels.

Despite the strong pace at which the mortgage industry has grown, players such as Gruh Finance have ample opportunities to grow, given the strong demand and shortage of housing in urban and rural areas. Most of the shortage is seen in the economically weaker section (EWS) and low income group (LIG) segments of the population.

Through its ‘Housing for All by 2022’ scheme, the Centre is trying to bridge the affordability gap in these low-income segments. The highlight of this scheme is the interest subvention of 6.5 per cent on housing loans up to 15 years to the EWS/LIG segment.

The government has also raised the income ceilings for both EWS and LIG categories under the new scheme — from an annual income of up to ₹1 lakh to ₹3 lakh for EWS and from ₹2 lakh to ₹6 lakh for LIG. This will bring more people under the ambit of the scheme. These initiatives present a huge opportunity for players, such as Gruh Finance.

The RBI’s proposal to lower risk weights on affordable housing loans from the existing 50 per cent will also free up capital to fund higher growth.

Players, such as Gruh Finance, are also better placed to ward off competition from banks that have been pursuing the housing finance segment. Given that banks mostly compete in the salaried segment, housing finance companies have created a niche for themselves in the self-employed segment.

Gruh’s loan book has grown 27 per cent annually over the last decade. Given its niche offering and the government’s focus on the affordable housing segment, the company is likely to grow its loan book by 22-25 per cent over the next two-three years.

In spite of the risk in the low-cost and self-employed segment, Gruh Finance has been able to maintain loan delinquency at very low levels through a diligent appraisal process and deep understanding of the local markets.

The company’s gross non-performing assets (GNPAs) have been 0.3-1 per cent of loans in the last five years. As of June 2015, the GNPAs stood at 0.52 per cent of loans. The company sports a healthy 30 per cent return on equity and over 2 per cent return on asset.

On the funding side, the company has also benefitted from the low-cost funds provided by National Housing Bank (NHB), due to its focus on rural and semi-urban housing. As of June 2015, funds from NHB account for 32 per cent of Gruh’s total borrowings.

The company has been able to maintain its net interest margins above the 4 per cent mark.