Repco Home Finance – IPO Analysis

Introduction

The Finance Minister has made some positive announcements for the housing finance space in the Union Budget 2013-14. One of them was an additional deduction of interest amount up to Rs 1 lakh for first time home loan borrowers up to Rs 25 lakh and the other was to allocate Rs 6000 crore and Rs 2000 crore towards Rural Housing Fund and National Housing Bank respectively. Adding to the positives, the Reserve Bank of India (RBI) is also expected to slash the repo rates, bringing down the interest rate in the economy.   

Considering all these positive steps, one company named Repco Home finance (RHF) intends to raise around Rs 270 crore (on higher band) through the IPO route. The funds raised by the company would be used to augment its capital base and its business development. We have looked at the prospects of the company and analysed the same to study whether the company has timed the market correctly and if should go for the IPO or skip it.

RHF was established way back in 2000 by its Promoters - The Repatriates Co-operative Finance and Development Bank (REPCO Bank). It is a south-based housing finance company which is primarily engaged in the business of providing housing loans to individuals and a loan against property. The loan book has witnessed a four year CAGR of 44% to Rs 2802 crore ending FY2012. Further, its loan portfolio is well diversified across salaried (47.29% of the total loan book) and non salaried borrowers (remaining 52.71%). The bank business is well collateralised on loans and hence the risk associated with the same is less. Despite being a more than a decade old company, it has a high geographical concentration, as around 97% of the outstanding loan portfolio as on September 30, 2012 comes from the southern India. 

On the financial front, revenue from operations has seen a four year CAGR of 47% to Rs 319 crore, while the Net Profit witnessed a CAGR of 45% to Rs 68 crore ending FY2012. However, the company faced serious headwinds on its Net Interest Margin (NIM) and on the asset quality front. Since FY2011, the company’s NIM has decreased substantially by 103 basis points to 3.82% as of September 30, 2012, majorly on account of higher cost of funds. Also, the Net NPA increased by 65 basis points to 1.6% which is reasonably high and not good for the company in the same period. As on September 30, 2012, the Capital Adequacy Ratio (CAR) stands at 15.94%, against the minimum requirement of 12% by the National Housing Bank (NHB).

On the valuation front, RHF on Post Issue basis is available at a Price to Book Value of 1.9x (on higher price band and taking into account book value as on September 30, 2012), which we believe is quite highly valued when compared to its peers like LIC and GIC Housing which are available at 1.9x and 1.32x respectively. This is because asset quality of both the companies are much stronger and are well established player than RHF. 

The company in 2007 had raised funds around Rs 76 crore by issuing Cumulative Fully Convertible Preference Shares (CCPS) to Carlyle group which were then converted into equity shares in July 2009, at Rs 51.32 per share. Looking at the issue price in the offer (Rs 172 per share), the company is demanding a price which is higher by 3.35 times (235 per cent returns) in less than a four year horizon. The company has performed well in the last four years. We, however, believe that this is because of a low base. Going ahead, we suppose that the company might not be able to continue this growth momentum.

The RHF has a concentration risk as majority of the operations are from south India. Undoubtedly, the company is into a business which has a good growth rate going ahead. However, it is a small player in its industry and hence faces huge competition. Banks also focus on the housing finance segment and we also have RHF direct and big competitors like HDFC, LIC Housing, and Dewan Housing Finance which covers most of the markets. The company is also facing headwinds on the NIM and the asset quality front currently. Considering all this, coupled with its availability on higher valuation, we believe that one could skip the issue.