Gruh Finance

I have been trying to blog on and off for last year and half but have not blogged much. Investing has been new found passion, probably the only passion, of my life and I spend most of my discretionalry time on this passion. In the coming weeks, I will try to explian the reason and rationale for owning stocks I have in my portfolio.

I hope it may be of some help to someone out there.

About Company
Gruh Finance is a subsidiary of HDFC primarily catering to lending loans to people with non-steady income sources (non-salaried class) for purchase and repair of houses in tier 2 & 3 cities. They started the operation in Maharashtra and Gujarat and since then have expanded the business Karnataka, Tamil Nadu, Chhattisgarh, Madhya Pradesh, and Rajasthan. They disburse around 65% of loans to Gujarat and Maharashtra so have significant upside in other states.
GRUH has formulated a risk management framework which lays the procedure for risk assessment and mitigation. The Risk Management Committee (RMC) comprises of the Managing Director as the chairman and the members include senior managers holding key positions in the Company. The RMC appraises the Audit Committee of the key risks associated with the business of the Company and the measures to mitigate them.
Financial Performance
Owning a house is a dream for all everyone irrespective of city they live in and money they make. Movement towards urbanization is adding fuel to fire and will continue for years to come.
Gruh Finance have done exceedingly well on almost all the financial parameters over the last 5 years. They have expanded into multiple states which will help them in growing at around 20% over next few years. Following are the performance on few of the key parameters
Parameter Value (04-05) Value (09-10) CAGR
EPS 6.31 19.89 25
Book Value 27.72 76.21
PAT 16.71 68.96
They have maintained capital adequacy level at around 16% over last 5 years and grown NII from 3.69% to 4.57 % over the same period. They may face challenge in maintaining the NII as similar level and it should stabilize at around 4.2 to 4.3%. They have reduced cost to income ration from 29% to 20 % and non-interest expense to average asset has come down from 1.25% to 1%.
Management
Gruh Finance has adopted an approach similar to parent company and has been conservative in keeping reserve against NPA and has maintained good capital adequacy level. Home loan is in their DNA and understand the business very well.
Conclusion
Compared to tier – 1 Housing Finance Company, Gruh Finance has very small scale and operate in a segment that is not very attractive to tier – 1 HFCs. It lends to around 1200-1500 people every quarter which is not a large number. In the recent 2-3 years Gruh Finance has expanded into multiple states which will help them in increasing the disbursement in next 3-5 years. Their main strength is giving loans to people who run small business, work in unorganized sector but has been able to maintain very low NPA.
No player, except probably Dewan Housing, operates in this space but as banks are spreading their wings into tier 2-3 cities it is matter of time before they start offering home-loans. But will they be able to design appropriate model for this segment?
The stock have moved more than 50% since I bought few months back but I still think it has significant upside in next 3-5 years.