Repco Home Finance Limited (RHFL)

IPO Note
Issue Snapshot:
Issue Open: March 13 March 15, 2013 Price Band: Rs. 165 - Rs. 172 Issue Size: Rs. 259.38 cr - Rs. 270.39 crs Issue Size: 15,720,262 equity shares QIB Retail Non Institutional Employees Face Value: Rs 10 Book value -: Rs 72.97 (September 30, 2012) Bid size: - 75 equity shares and in multiples thereof 100% Book built Issue Upto atleast atleast 7,770,130 eq sh 5,439,092 eq sh 2,331,040 eq sh 180,000 eq sh

March 12, 2013

Background & Operations: Repco Home Finance Limited (RHFL) is a professionally managed housing finance company headquartered in Chennai, Tamil Nadu promoted by The Repatriates Co-operative Finance and Development Bank Limited (Repco Bank Limited), a Government of India owned enterprise, in April 2000, to tap the growth potential in the housing finance industry. It is registered as a housing finance company with the NHB, the housing finance regulator of India. RHFL is engaged primarily in the business of financing (i) the construction and/or purchase of residential and commercial properties including repairs and renovations (Individual Home Loans); and (ii) loans against properties (Loans Against Property). As of December 31, 2012, it had 73 branches and 19 satellite centers located in Tamil Nadu, Karnataka, Andhra Pradesh, Kerala, Maharashtra, Odisha, West Bengal, Gujarat and the Union Territory of Puducherry. RHFL has leveraged its key strengths of (a) direct customer contact and customer ownership, (b) focus on quality customer servicing, transparency and speed of operations, (c) focus on relatively underpenetrated markets and segments, (d) robust risk management systems and processes, (e) low cost operations, (f) well recognised brand in South India with an established track record, and (g) experienced senior management team, to generate significant growth in loan book and profitability, while maintaining strong asset quality. Its outstanding loan portfolio has grown at a CAGR of 43.81% from Rs. 6,550.83 million as of March 31, 2008 to Rs.28,021.55 million as of March 31, 2012. RHFLs loan portfolio is well diversified across salaried and non - salaried borrowers. Loans to salaried and non-salaried borrowers constituted 47.29% and 52.71%, respectively, of its loan book as at September 30, 2012. The non-salaried borrower base, is a relatively under penetrated target segment, comprises Self Employed Professionals (SEP) and Self Employed NonProfessional (SENPs). It intends to grow its loan book, income and profits through (a) deepening its reach in existing regions and expanding to new regions, (b) continued focus on under penetrated markets, (c) maintaining strong asset quality through continued focus on risk management, (d) accessing low cost and diversified sources of funds, and (e) maintaining low operating costs, amongst others. Objects of Issue: RHFL intends to utilise the proceeds from the Issue, after deduction of the Issue related expenses (the Net Proceeds) towards augmentation of its capital base to meet its future capital requirements arising out of growth in its business.

Capital Structure:
Pre Issue Equity: Post issue Equity: Listing: NSE & BSE Lead Manager: SBI Capital Markets Limited, IDFC Capital Ltd and JM Financial Institutional Securities Pvt Ltd. Registrar to issue: Karvy Computershare Pvt Ltd Shareholding Pattern Pre issue % Promoters & Promoter Group Public (incl nonresident companies, institutions & employees) Total 50.02 Post issue % 37.36 Rs. 46.44 cr Rs. 62.16 cr

49.98 100.0 3/5

62.64 100.0 indicating

ICRA Fundamental Grade: average fundamentals

Triggers: Direct customer contact and customer ownership: RHFLs marketing strategy is focussed on direct and localised advertising through loan camps and word of mouth referrals. As a result, most of its customers are either walk-in borrowers or referred by existing borrowers. The branches are responsible for sourcing loans, carrying out preliminary checks on the credit worthiness of the prospective customers, providing assistance in documentation, disbursing loans and in monitoring repayments and collections. This approach allows RHFL to have direct contact with the customer at all times and enables it to provide personalised service to all of its customers resulting in a satisfied customer base, increased customer connect and loyalty.

Retail Research

Focus on quality customer servicing, transparency and speed of operations: RHFL branch offices serve as a single point of contact for customers. Since face-to-face meetings with its customers are mandatory for procuring its loan products, its branch personnel are able to clearly articulate and explain the various loan products to the customers, the rates of interest, fees and charges, key distinguishing features of various products offered, and the timelines for credit appraisal and disbursement. This approach reduces the possibility of mis-selling a loan to a customer and hence reduces potential for future disputes. Focus on relatively under penetrated markets and segments: RHFL is consciously targeting markets that are relatively underpenetrated. The key target markets of RHFL is in tier 2 and tier 3 cities and at the peripheral areas of tier 1 cities and as of December 31, 2012, the Company had 77 branches and satellite centres catering to these markets. Sustained growth in the Indian economy will result in urbanization and significant development in tier 2 and tier 3 cities, and RHFL is expected to benefit from this trend. RHFLhas been able to successfully penetrate the non-salaried segment given its direct customer contact, tailored approach and personal evaluation processes followed during credit appraisal. Robust risk management systems and processes: RHFL has robust risk management systems and processes in place across all areas of operations, namely loan origination, credit appraisal, loan disbursement, and collection and recovery. Its risk management systems and processes have resulted in maintaining good asset quality. Gross NPA and net NPA as at September 30, 2012 was 2.12% and 1.60%, respectively and its gross NPA and net NPA as at September 30, 2011 was 1.76% and 1.38%, respectively. The robustness of the risk management systems of RHFL is also demonstrated by the fact that the total amount of loans written off since inception till September 30, 2012 was only Rs 37.10 million, which was 0.08% of its total disbursements of Rs 43,129.11 million for the same period. Low cost operations: RHFL has been able to operate branches in tier 2 and tier 3 cities in a commercially viable manner. Each of its branches generally consists of three or four employees who possess local knowledge and a good understanding of customer needs. Further, its centralised model of credit appraisal helps reduce its administrative costs. Low cost business model helps it to expand into and sustain its operations in tier 2 and tier 3 cities, which are relatively under penetrated. Well recognised brand in South India with an established track record: Promoter of RHFL has been operating in South India since 1969 and has all of its 76 branches located in South India with approximately 640,000 customers as of December 31, 2012. In addition, its Group Companies, Repco MSME Development & Finance Limited and Repco Foundation for Micro Credit operates in 60 locations in South India as at December 31, 2012. As a result, Repco is a well-recognised brand in South India, which has contributed to earning the trust of its customers, enabling it to continually strengthen its foothold in South India. Experienced senior management team: RHFLs senior management comprises professionals with significant experience in all areas of banking and housing finance. Its management team has a long term vision and provides stability and continuity to its business. A capable and talented pool of trained personnel at RHFLs head supports its senior management office and branch offices. This enables it to solicit better quality loan proposals, improve credit appraisal, manage risks better, and provide better quality service to its customers. Business Strategy: Deepening its reach in existing regions and expanding to new regions: RHFL intends to deepen penetration in South India and expand its footprint in a phased manner by selectively setting-up new branches in the states of Maharashtra, Gujarat and West Bengal amongst others. To deepen its penetration in existing geographies, it plans to selectively expand in the adjoining areas of its existing branches, since this would enable it to leverage its experience in these regions, and also generate greater brand awareness and word-of-mouth referrals. Backed by its familiarity and localised experience, RHFL expects to grow its business by tapping into opportunities in these regions. Systematic geographical expansion, matched with a continued focus on its competitive strengths, would help it in significantly improving its market share and drive growth. Continued focus on under penetrated markets: RHFL plans to continue to target markets that are relatively under penetrated. Its key target markets continue to be tier 2 and tier 3 cities and peripheral areas of tier 1 cities. RHFL will continue to target nonsalaried customers in the key target markets (comprising SEP and SENPs) who are largely under served. Given its continued focus on and experience in dealing with customers in the underserved target markets as mentioned above, RHFL understand the customer requirements in these markets and shall continue to evolve processes and products to cater to the needs of the target segment that it serves. Maintaining strong asset quality through continued focus on risk management: Maintaining strong asset quality is paramount in RHFLs business as it directly impacts its provisioning, profitability, net worth and CRAR. Further, its ability to control levels of NPAs and maintain credit quality of its loan portfolio indicates robust risk management systems and policies that it has in place. The objective of its risk management system is to measure and monitor the various risks that is subject to, and to implement policies and procedures to address such risks. RHFL intends to continue improving its operating processes and risk management systems that will further enhance its ability to manage its growth and the risks inherent to the business.

Retail Research

Accessing low cost and diversified sources of funds: RHFL source funds for its business primarily through loans from banks, refinance from NHB and short term credit/overdraft facilities from its Promoter. It intends to explore the option of raising funds through rated debt instruments. It also plan to explore access to low cost sources of funds in order to maintain its CRAR and strengthen balance sheet. RHFL would like to diversify its sources of funding and tap into alternative sources such as fixed deposits, multi-lateral agencies and rated long term and short term listed debt instruments. This will enable it to reduce the risk of lender concentration and optimise its funding costs, which in turn enables it to maintain the NIM. Maintaining low operating costs: RHFLs cost to income ratio is amongst the lowest in the housing finance industry. It has been able to successfully operate branches in tier 2 and tier 3 cities at low costs ensuring the commercial viability of such branches. Further, RHFL is continuously focused on improving efficiency and lowering operational costs, and to achieve the same it continuously monitor metrics such as outstanding loan per employee and profit per employee, amongst others. Industry: Housing Finance Industry In India Indias housing finance industry mainly comprises banks and HFCs, and to a certain limited extent, smaller institutions such as community-based organisations, self-help groups, etc. The NHB operates as the principal agency for promoting, regulating and providing financial and other support to HFCs at local and regional levels, while banks and NBFCs are managed and regulated by the RBI. As of February 5, 2013, 56 companies have been granted certificates of registration by NHB to act as HFCs. Historically, the housing finance industry was dominated by HFCs. However, towards the end of the 1990s, the scheduled commercial banks became very active in lending to the housing sector in the backdrop of lower interest rates, rising disposable incomes, stable property prices and fiscal incentives by the government. While banks depend on their own equity and reserves and large deposit base for funding their housing loan portfolios, HFCs primarily depend on funding sources such as loans from banks and financial institutions, financing from NHB, borrowing through bonds and debentures, commercial paper, subordinate debt and fixed deposits from public, besides their own equity and reserves. Increased competition in the housing finance industry has also led to the introduction of new mortgage products in the market, such as variable interest rate loans, loan for repairs and renovation, and customised products with features like ballooning EMI, depending on the need and eligibility of the borrowers concerned. In addition, some banks and HFCs also offer home equity loans (loans against the mortgage of existing property), which may be used for non-housing purposes. Disbursements As per CRISIL estimates, housing finance disbursements are estimated to have grown by around 16.1% in Fiscal 2012 to Rs 2,044 billion (as compared with Rs 1,760 billion in Fiscal 2011). Over the next 5 years, housing finance disbursements are projected to grow at a CAGR of 16% to reach Rs 4,269 billion by Fiscal 2017. Increase in transaction volumes, rise in property prices and higher loan to value (LTV) ratios are some of the key drivers behind the growth in disbursements in the housing finance industry. Outstanding Loans The quantum of outstanding loans is impacted by a combination of disbursements, repayments and pre-payments. As per CRISIL estimates, housing finance outstanding portfolio, i.e. the total loan book of a housing finance player, grew by around 19% Y-o-Y in Fiscal 2012 (to Rs 6,150.5 billion as compared with RS 5,173.6 billion in Fiscal 2011), due to a steady growth in disbursements and lower prepayments. The housing finance outstanding portfolio is expected to grow at a CAGR of 17% to reach Rs 13,602.8 billion in Fiscal 2017 Growth in housing stock For the housing finance industry to grow, there has to be an available stock of houses, which can be mortgaged. Any growth in this available stock of houses will provide additional impetus to the growth of the housing finance industry. The annual addition to housing stock in India peaked in Fiscal 2008 after a period of continued growth driven by increase in demand, especially in urban areas. As per CRISIL Research, housing stock is estimated to grow at a CAGR of 2.3% over the next five years (Fiscal 2012 Fiscal 2016) with a higher growth expected in the urban segment (CAGR of 3.3% from Fiscal 2012 Fiscal 2016) as compared to the rural segment (CAGR of 1.8% from Fiscal 2012 Fiscal 2016). The share of rural housing stock, as a percentage of total housing stock is expected to fall marginally by Fiscal 2016 as compared to Fiscal 2011 on account of increasing migration from rural to urban regions because of better job opportunities. Key Trends In The Housing Finance Industry In India HFCs gaining market share Over the years, the market share of housing finance companies (HFCs) has significantly improved vis--vis banks on account of robust growth in disbursements of the former. In recent times, with slowdown in corporate credit, banks are aggressively focusing and competing with HFCs in the home loan segment. However, with strong origination skills and diverse channels of sourcing business, HFCs will continue to gain market share.

Retail Research

Focus on salaried segment, self-employed borrowers ignored Historically banks and HFCs have largely focused on the salaried class, as can be seen by the fact that salaried borrowers account for 80-85% of the total outstanding loans. The key reason behind this skew towards the salaried segment is the ease in validating the income levels and the repayment capabilities of salaried borrowers vis--vis self-employed persons. Further, lenders have traditionally viewed the salaried segment as one with stable cash flows and, hence, consider it as lower risk. However, this has also resulted in the self-employed borrowers being largely ignored by the organised lenders, forcing them to rely on personal loans or loans from unorganised sources at higher interest rates. HFCs have been able to maintain net profit margins According to CRISIL, HFCs, despite having a higher cost of funds as compared to banks, have been able to maintain comparable gross spreads and with improved efficiencies, lower operating costs and better risk management practices, have a net profit margin slightly higher than the banks. As per their estimates, HFCs are expected to maintain a net profit margin of 1.6-1.7% of loan book as against banks at 1.5-1.6% of loan book based on incremental disbursements. Diversification of sources of funds by HFCs The typical funding sources for HFCs include bank loans, non-convertible debentures (NCD), fixed deposits, commercial papers, NHB refinancing and other loans. Larger HFCs have been able to build a more diverse funding base due to their superior credit rating and their ability to target the NCD market for funds. In contrast, smaller HFCs have leveraged the NHB refinance facility for priority sector/rural lending, which is offered at lower than market interest rates. This has helped the smaller HFCs to compete with banks and larger HFCs by reducing their cost of funds. Floating rate loans account for bulk of market All housing loans in India typically carry a fixed interest rate or a floating interest rate. A fixed rate loan is one where the rate of interest remains constant throughout the tenure of the loan or for a specific number of years. Whereas, in a floating rate loan, the borrower pays interest at a rate that is linked to the benchmark prime lending rates of financiers. The rate charged on fixed rate loans is generally higher than that charged on floating rate loans, due to the higher interest rate risk in case of the former. Due to the long-term nature of the housing loans and medium-term nature of the lenders liabilities, lenders prefer to lend at floating rates, as it allows them to re-price the loans as and when their cost of funds increases. The proportion of floating rate loans has been increasing for the last several years, primarily due to the indirect push from the lenders side by way of a higher spread between fixed rate loans and floating rate loans, which in some cases was around 275 bps. Post 2009-10, the rising interest rate scenario made borrowers opt for floating rate loans in anticipation of reduction or stabilization of interest rates in the later years. According to CRISIL, the proportion of floating rate loans is expected to continue rising and reach around 97% in Fiscal 2017. Concerns: RHFL has experienced continuous growth in the past. It cannot be assured that it will be able to sustain its growth including the growth of its outstanding loan portfolio at historical rates, or at all, in the future, which may in turn have a material adverse effect on its business, results of operations and financial condition. Any volatility in RHFLs rates of borrowing and lending may adversely affect NIM, which may in turn have a material adverse effect on its business, results of operations and financial condition. Business prospects and continued growth depends on RHFLs ability to access financing at competitive rates and competitive terms, which amongst other factors is dependent on its credit rating. Funding is concentrated amongst a few lenders, particularly NHB and Promoter, and impairment of RHFLs relationship with any, or all, of such lenders or its inability to secure loans on favourable terms from such lenders in the future, may have a material adverse effect on its business, results of operations and financial condition. If RHFL is unable to manage the level of NPAs in its loan portfolio, this may have a material effect on its business, results of operations and financial condition. The primary security for the loans disbursed by RHFL is the underlying property. In the event of default, it may not be able to realize the expected value of the collateral on loans due to fluctuating real estate prices and/or enforce the security under the SARFAESI Act in time or at all in the event of default and this may have a material adverse effect on its business, results of operations and financial condition. RHFL is subject to NHB regulations in relation to minimum capital adequacy requirements and a decline in its CRAR will require it to raise fresh capital, which may not be available on favourable terms, or at all, which may affect its business, results of operations and financial condition. RHFL is subject to various regulatory and legal requirements. Also, future regulatory changes may have a material adverse effect on its business, results of operations and financial condition.

Retail Research

Certain housing loans offered by HFCs are eligible for refinance at concessional rates from NHB and eligible for fiscal incentives by the Government of India. If some or all of these incentives or refinance at concessional rates are reduced or withdrawn, this may result in a material adverse effect on business, results of operations and financial condition. Increasing competition in the Indian housing finance industry and RHFLs inability to effectively compete with other organisations operating in the housing finance industry may result in slower growth and/or a decline in its profitability which may have a material adverse effect on its business, results of operations and financial condition. RHFL has experienced incidents of fraud in the past and may experience such frauds in the future as well, which may have a material adverse effect on its business, results of operations and financial condition A major part of RHFLs branch network is concentrated in southern India and hence it is exposed to geographical risks, which may affect its business, results of operations and financial condition. RHFL is subject to restrictive covenants under its financing arrangements that could limit its flexibility in managing its business and maintaining the growth of loan portfolio, which may in turn have a material adverse effect on the business, results of operations and financial condition. Performance and growth are dependent on the performance of the Indian and global economic conditions. A slowdown in economic growth in India as well as globally may have an adverse effect on RHFLs business, results of operation and financial condition Inflation in India could have a material adverse effect on RHFLs profitability, its business, results of operations and financial condition. A decline in Indias foreign exchange reserves may affect liquidity and interest rates in the Indian economy, which could adversely impact RHFL.
Rs. Million

Restated Financials Profit & Loss: Particulars INCOME Revenue from operations Other Income TOTAL INCOME EXPENDITURE Interest and other Financial Charges Employee benefit expense Depreciation and amortization expense Other expenses Provision for Non- Performing Assets Provision for Standard Assets Provision for Diminution in Value of Investment Bad-Debts Written Off TOTAL EXPENDITURE PBT TAX EXPENSE Current tax Fringe Benefit tax Deferred tax PAT Balance Sheet:
Rs. Million

H1FY13 1,888.00 0.41 1,888.41

2012 3,188.15 0.71 3,188.86

2011 2,255.37 4.14 2,259.51

1,253.98 57.51 6.22 33.99 48.03 11.11 0.00 0.00 1,410.84 477.57 139.80 0.00 -18.37 356.14

2,023.10 105.05 16.17 72.88 63.53 30.42 0.00 0.39 2,311.54 877.32 253.40 0.00 -51.72 675.64

1,278.67 72.20 15.73 61.73 16.12 28.46 0.00 9.59 1,482.50 777.01 220.00 0.00 -9.03 566.04

YE March(Rs. Mn.) Equity & Liabilities Shareholders Funds Share Capital Reserves & Surplus Non-Current Liabilities

H1FY13 3388.8 464.41 2924.37 19989.1

FY12 3032.6 464.41 2568.2 17948.3

FY11 2416.4 464.42 1952.0 13213.0

5

Retail Research

Long Term borrowings Long Term Provisions Current Liabilities Short Term Borrowings Other Current Liabilities Short Term Provisions Total Equity & Liabilities Assets Non-Current Assets Fixed Assets Tangible assets Intangible Assets Non Current Investments Deferred tax assets Long -term Loans and Advances Current Assets Current Investments Cash and Bank Balances Short Term Loans & Advances Other Current Assets Total Assets Extract from grading rationale by ICRA:

19684.21 304.89 8112.6 3066.61 5029.48 16.53 31490.5 29281.7 32.4 31.06 1.34 80.5 97.67 29071.13 2208.8 0 165.58 1957.12 86.1 31490.5

17702.1 246.2 7527.0 2405.2 5041.4 80.4 28507.9 26484.1 33.2 31.6 1.6 80.5 79.3 26291.1 2023.8 0.0 175.0 1779.6 69.2 28507.9

13064.2 148.8 5343.4 2430.3 2850.9 62.2 20972.8 19417.6 30.0 27.9 2.1 20.5 27.6 19339.5 1555.2 0.0 84.6 1418.7 52.0 20972.8

The assigned grading factors in the long term favourable demand outlook for mortgage loans in India due to currently low penetration levels and, RHFLs established position in the South Indian housing finance market in a niche customer segment. With a sizeable share of its branches in Tier-II and Tier-III cities, RHFL focuses on the largely under-penetrated customer segment, both salaried and self-employed, which has helped the company grow profitably so far. Notwithstanding its recent initiatives to expand to newer markets, RHFL is concentrated largely in South India (98% of the portfolio in March 2012) exposing it to competitive pressures thus limiting the scope for scale and margin expansion at least over the medium term. Further, a sizeable proportion of the companys loans are to the self-employed segment, which is largely credit untested and could be vulnerable to adverse economic cycles. As a result of this, 30+ delinquencies are relatively high at 14.8% as on September 30, 2012, however 90+ delinquencies remain under control at 2.1%. The grading also takes note of the currently subdued operating environment, which exerts pressure on the business growth, profitability and asset quality of all housing finance companies (HFCs) including RHFL. However, the company experienced management team and its systems which are developed and pruned over the years of operations provide comfort to an extent. The company is faced with a deteriorating trend in its profitability and its asset quality indicators over the last two-three financial years. RHFLs profitability indicator nevertheless continues to remain healthy (ROE 22.3% in fiscal 2012) vis--vis industry standards and, it currently has a comfortable capitalization profile (gearing 8.3 times in March 2012). ICRA however notes that ability of the company to diversify its funding profile, which is presently highly concentrated and, to efficiently expand its operations in newer geographies is yet to be established, which is critical for its future business growth and to maintain a healthy financial profile.

RETAIL RESEARCH Fax: (022) 30753435 Corporate Office HDFC securities Limited, I Think Techno Campus, Bulding B, Alpha, Office Floor 8, Near Kanjurmarg Station Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Fax: (022) 30753435 Website: www.hdfcsec.com Disclaimer: This document has been prepared by HDFC securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for nonInstitutional Clients only. Disclaimer: HDFC Bank (a shareholder in HDFC securities Ltd) is associated with this issue in the capacity of Bankers to the issue and Refund Bankers to the issue and will earn fees for its services. This report is prepared in the normal course, solely upon information generally available to the public. No representation is made that it is accurate or complete. Notwithstanding that HDFC Bank is acting for Repco Home Finance Ltd. this report is not issued with the authority Repco Home Finance Ltd. Readers of this report are advised to take an informed decision on the issue after independent verification and analysis.

Retail Research