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Gruh Finance: Invest

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Buoyant market for housing loans together with stable outlook for margins make Gruh Finance an attractive play in housing finance.

Radhika Kamath

Offer at 30 per cent discount to market price
Stable outlook for NIMs
Diversifying credit profile
Slowdown in housing market, a risk

Healthy financial contours, strong business growth, buoyant demand for housing and an encouraging outlook for margins make the rights offer of GRUH Finance an attractive proposition.

Shareholders can consider subscribing to the offer at Rs 75 per share, which is at a discount of over 30 per cent to the market price of Rs 110.

Premium valuation

At this price, the stock is valued at about nine times its trailing four quarters earnings and 1.7 times its book value. This is at the higher end of the spectrum as LIC Housing Finance and Dewan Housing finance its closest peers are available at an average P/BV of 1.3.

However, considering a profit growth of 32 per cent in the first quarter and a dividend yield of 3.3 per cent, the valuation is attractive.

GRUH Finance is better placed on several parameters

vis-a-vis

its peers, which justifies its premium valuation. Its return on net worth at 24 per cent and return on average assets of 2.1 per cent are well above the peer group average of 16 per cent and 1.7 per cent respectively.

Impressive numbers

GRUH Finance, which is a dominant player in the rural housing financing business, has been turning in impressive set of numbers over the last few years. Loan disbursements over the last three years have clocked a CAGR of about 20 per cent. Despite stiff competition from banks, which control about 60 per cent of the housing finance market, GRUH Finance has fared well, thanks mainly to the strong demand for housing. During FY-06, the company's total outstanding loans rose to Rs 1,069 crore from Rs 817 crore in FY 05.

That the proportion of outstanding loans at variable interest rates increased to 82 per cent from 73 per cent in the previous year is also a positive. This is likely to have a favourable impact on its net interest margins (NIMs). With interest rate cycle now coming close to a pause, economic indicators largely point to a stable interest rate outlook over the medium term. While this is unlikely to result in significant expansion in NIMs, it does lend an element of stability to it. Pre-payment ratio, which stood at close to 10 per cent in FY-05, has slipped to about 8 per cent. This is again a healthy sign as it reduces the possibility of an asset-liability mismatch and helps even-out spreads.

GRUH Finance is now looking at increasing the role of referral associates or business agents with the objective of generating higher business volumes. Its strategy of diversifying its credit profile is also likely to benefit it over the medium-to-long/term. The company has been slowly stepping up its exposure to non-residential properties and advancing loans to developers. Although home loans accounted for a good 92 per cent of the total outstanding loans, the balance was made up by loans to other than residential properties.

The company has done well to bring down the level of bad loans and cost of funds. The average cost of total borrowings in FY-06 was 6.5 per cent as against 7.2 per cent in the previous year. Low levels of bad loans at 0.2 per cent also add a great deal of comfort.

Strong thrust on housing

The market for housing finance promises healthy growth, despite the odds. The proportion of outstanding housing loans, as a fraction of GDP, has risen from 3.4 per cent in 2001 to about 7.5 per cent in 2006. With Government's strong thrust on providing `Housing for all', this figure is expected to improve over the next few years. Further, India's mortgage-to-GDP ratio at about three per cent compares poorly with other South-East Asian economies, where the ratio ranges between 15 per cent and 20 per cent.

GRUH Finance is a subsidiary of HDFC, which is a major positive; HDFC has a 61 per cent stake. The company has successfully leveraged its relationship with HDFC and has built strong customer awareness, particularly in western India. Although there is nothing in the offer document about the likely merger with HDFC, its possibility cannot be ruled out. Should such a merger take place, it is likely to add value to the shareholders of GRUH Finance.

Any unexpected slowdown in the housing market remains a principal risk to our recommendation.

Offer details

On offer are 79.5 lakh shares in the ratio of three shares for every 10 held.

Post-issue, capital adequacy ratio of the company is going to increase to 20.8 per cent from 14.2 per cent now. DSP Merrill Lynch is the lead manager to the issue.

(This article was published in the Business Line print edition dated October 1, 2006)
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