Investors can refrain from subscribing to the Initial Public Offer from Repco Home Finance (RHF). Though the company’s home lending business has many strengths such as its strong growth, focus on niche markets and segments not targeted by larger players, loan quality issues may suppress valuations for the stock in current market conditions. The business, however, appears good and the stock bears watching for investments at a later date.

At the higher end of the price band at Rs 172, the stock will trade at 1.7 times price to book for FY 2013 (post issue) and 1.8 times adjusted book value (adjusted for the entire net NPAs). At current valuations, it remains at the top end of its peer valuations and thus leaves limited scope for upside.

Widening footprint

RHF, a wholly-owned subsidiary of Repco Bank (a Government-owned cooperative bank) extends home loans to the southern market with a focus on Tamil Nadu, particularly in tier-2 and tier-3 cities. While the company’s niche focus has driven a strong growth in loan book and profitability in the past, it is now widening its footprint in newer regions such as Maharashtra, Gujarat and West Bengal among others.

RHF has delivered a robust loan growth of 44 per cent annually over 2008-12. The lion’s share of business is from South India, particularly from Tamil Nadu and the average loan size is low at Rs 9.2 lakh, which gives them an edge over other players.

The company posted a strong loan growth of 27.5 per cent in the half-year ended September 2012. However, the pace of growth has slowed down from the 40 per cent plus level in earlier years.

Given its low ticket size, the company has been able to utilise the NHB refinance facility availing of loans at a 7.5-8 per cent interest rate. Forty-four per cent of its funding requirement comes from this source. This has kept the cost of funds lower at 9.5 per cent, than its competitors such as Dewan Housing (10.7 per cent) or LIC Housing (9.7 per cent).

A sizeable portion of loans is to the self-employed segment, which constitutes 53 per cent. This has resulted in higher delinquencies. The gross non-performing assets have grown significantly from 0.96 per cent in 2009 to 2.1 per cent in September 2012. Particularly of concern is the very low provision coverage ratio at 31 per cent in March 2012, which further slipped to 25 per cent in September 2012. This is likely to impact market perception of the stock at a time when loan quality is a primary concern.

The issue

The initial public offering comprises an issue of fresh equity shares of 1.57 crore. The price band for the issue has been fixed at Rs 165-172 a share. The promoter, Repco Bank, currently holds 50 per cent share, which post the issue will come down to 37.4 per cent.

The company will use the proceeds to meet its capital requirement. Currently it has as a capital adequacy ratio of 15.9 per cent well above the NHB requirement of 12 per cent.

>radhika.merwin@thehindu.co.in

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