Retail Research Initiating Coverage

Housing Finance 15 April 2013 BUY: Rs 196 Target: Rs 241

Gruh Finance Ltd.

Gruh Finance Ltd (GFL), a subsidiary of HDFC Ltd., was promoted in the year 1986. The company is a leading small ticket size housing loan provider with predominately based in tier 2 and tier 3 cities & towns in the states of Maharashtra and Gujarat driving ~70 percent of business. The company's loan assets have grown rapidly at 24 percent CAGR in last 10 years and with, rapid geographical expansion; we expect the tempo of growth momentum to continue at 24-26 percent CAGR for next 3-5 years. We initiate coverage on the stock with 'BUY' rating.

Investment Rationale
Niche presence in relatively high growing market: The Company predominately provides low ticket size housing loan to individual in salaried and self employed categories. The company is comfortably positioned with regards to loan to value ratios with average outstanding loan per head at 4.61 lakh as compared to average cost of dwelling unit at Rs7.5 lakhs. Gruh operates in tier 2 and tier 3 cities and towns in the states of Maharashtra and Gujarat which is not only growing rapidly but are relatively matured market as compared to other emerging real estate geography. Over the year, due to rise in property price index, the incremental credit per head is enhanced to Rs7.25 lakh. The company is on a rapid geographical expansion mode to add ~10-12 branches per year in growing real estate market like Rajasthan, Madhya Pradesh and Chhattisgarh etc. Gruh has innovative products viz GRUH Suraksha, GRUH Suvidha, GRUH Sajavat and GRUH Samruddhi to lend for different housing needs. Enjoys premium spread and NIM: The Company being present in niche segment, enjoys on an average over 13 percent yield on advances with healthy spread of over 4 percent and net interest margin ~5 percent. These markets require tremendous of skill and experience to manage risk and understand the demographic nature of borrowers. The company has proven business model with 90 percent loan asset comprises of individual loan and over 40 percent business coming from rural areas. To ensure a deeper geographic reach, GRUH has been sourcing retail business through third party channels by appointing GRUH Referral Associates (GRAs). GRAs only source loans while GRUH retains control over the credit, legal and technical appraisals. Business sourced through GRAs was 58.6 percent of incremental credit for the year FY12.

STOCK DATA BSE Code NSE Code Bloomberg Code 52 Week High / Low (Rs.) Face Value (Rs.) Diluted Number of Shares (Crore.) Market Cap. (Rs Crore.) Avg. Yearly Volume (NSE) SHAREHOLDING PATTERN (%) Particulars Promoters FII Other Institution Public & Others Total Dec. FY12 59.9 14.3 1.1 24.7 100.0 Sept. FY12 59.9 15.0 1.7 23.4 100.0 Jun. FY12 60.0 14.5 2.2 23.3 100.0 Mar. FY12 60.4 14.6 2.1 22.9 100.0 511288 GRUH GRHF IN 250 / 127 2.0 17.9 3498 34125

RETURNS STATISTICS (%) 1M Gruh Finance Ltd Sensex (2.8) (6.8) 3M (14.7) (7.2) 6M 6.7 (2.3) 12 M 53.0 5.3

FINANCIAL SUMMARY Particulars NII (Rs Cr) PAT (Rs Cr) EPS (Rs) BV (Rs) P/BV (x) Div Yield (%) ROE (%) ROA (%) 2011A 133.5 91.5 5.2 18.1 10.8 1.1 31.4 3.1 2012A 166.6 120.3 6.8 21.8 9.0 1.2 34.2 3.1 2013A 246.0 145.9 8.2 27.5 7.1 1.3 33.3 2.9 2014E 297.2 194.9 10.9 35.4 5.5 1.3 34.7 3.0 2015E 377.2 249.3 14.0 45.9 4.3 1.5 34.4 3.0

RELATIVE TO SENSEX
Gruh Finance Ltd 205.0 145.0 85.0 25.0 Mar12 May12 Jul12 Sep12 Nov12 Jan13 Mar13 Sensex

RAJESH GUPTA - Research Analyst Regd. Office: SBICAP Securities Limited, 191, Maker Towers 'F', Cuffe Parade, Mumbai 400 005 For a list of our branches refer to our website: www.sbicapsec.com

Gruh Finance Ltd. Well capitalized balance sheet:

The NHB guideline has mandated minimum 12 percent Capital Adequacy Ratio (CAR). The company has maintained on an average ~15 percent CAR since last 4 years. We continue to believe that, Gruh would maintain over 14 percent CAR going forward.
CAR (%)
16.5

Housing Finance

15.0 14.6 14.0 13.5 13.3

14.7

15.0

~We continue to believe that, Gruh would maintain over 14 percent CAR going forward.

12.0 FY11A FY12A FY13A FY14E FY15E

Source: SBICAP Securities Research

Impressive growth in loan assets with low NPA

Despite the weak economic outlook and sluggish real estate market, loan disbursement has grown at a 27 percent CAGR between 2009 and 2013 from Rs2091 crore to Rs5438 crore in respectively. We expect the loan asset to further grow at a 27 percent CAGR for next 2 years between FY13A and FY15E to Rs8832 crore. Despite impressive growth in loan assets, the quality of outstanding credit remains intact, in fact the Gross Non Performing Assets (GNPA) as a percentage of outstanding loan asset has reduced to 0.32 percent in FY13 from nearly 1 percent in FY09. We expect, GNPA to remain below 0.4 percent level to due to strict credit appraisal, though company continued its effort recover bad loans.
TOTAL OUTSTANDING ADVANCES & GNPA
Total Outstanding Advances (Rs Cr) 9,000.0 7,000.0 5,000.0 3,000.0 1,000.0 2011A 2012A 2013A 2014E 2015E 0.5 0.32 0.3 0.3 0.8 GNPA (%) 0.9 0.7 0.5 0.3 0.1

~We expect the loan asset to further grow at a 27 percent CAGR for next 2 years between FY13A and FY15E to Rs8832 crore.

27% CAGR

Source: SBICAP Securities Research

2 April 15, 2013

SBICAP Securities Limited

Gruh Finance Ltd. 100% provisioning coverage with rapid expansion on card
GFL has taken steps over and above the NHB guideline on provisioning requirement. The Net Non-Performing Assets (NNPA) is NIL since last 5 years. NHB has introduced 0.4 percent provision on standard assets from Oct.2011onward and Guh has created additional provision over and above requirement as per prudential guideline. The company presently has 134 retail branches and offices spread across 7 states. Gruh has planned to add 10-12 offices per year to take total tally beyond 150 by FY15. We expect major expansion plan to be centered around high growing states like Rajasthan, MP and Chhattisgarh etc.
PROVISION COVERAGE & GNPA
Provision Coverage (%) 100.0 0.8 70.0 0.5 0.32 10.0 2011A 2012A 2013A 2014E 2015E 0.3 0.3 0.2 0.7 GNPA (%) 1.0

Housing Finance

40.0

0.5

Source: SBICAP Securities Research

SANITATION LEVELS IN VARIOUS COUNTRIES

No. of Taluka 375 250 125 0 Maharashtra Karnataka Rajasthan Chhattisgarh Tamil Nadu Gujarat MP 224 215 357 291 175 63 66 240 259 130 89 25 22 209 Presence

~Rajasthan, MP and Chhattisgarh would be the focus areas for further expansion. ~We expect the penetration level to increase with increasing investment and focus towards development of these states.

Source: SBICAP Securities Research / Company

Attractive affordable home finance market

Due to rapid urbanization, the shortage of urban house stands at 18.8 million units (as per census 2011) ~99% is towards EWS/LIG/MIG. According to the working group of rural housing, for Twelfth five year plan (2012-2017) the estimated shortages of housing is expected to be ~44 million units, nearly 90% of these shortage is with respect to the population below poverty line (BPL).

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April 15, 2013 3

Gruh Finance Ltd.

According to KPMG, by 2050 India will add another 900 million people to urban area and rate of urbanization is expected at ~2.1 percent CAGR, double than China. Though, there has been phenomenal growth in housing finance market over the years, the housing loan to GDP ratio ~7% still far below than other emerging economies. Housing finance market for loan between Rs3-10 lakh is estimated over Rs1 trillion. Gruh's average ticket size of loan is less than Rs5 Lakh whereas incremental credit per head is ~Rs7.25 lakh which falls under Rs3-10 lakh categories which is driving the overall demand. Only 20% of total loan disbursed in FY 2011 were loan in the bracket of 3-10 Lakh.

Housing Finance
~According to the working group of rural housing, for Twelfth five year plan (2012-2017) the estimated shortages of housing is expected to be ~44 million units. ~Housing finance market for loan between Rs3-10 lakh is estimated over Rs1 trillion. Gruh's average ticket size of loan is less than Rs5 Lakh whereas incremental credit per head is ~Rs7.25 lakh which falls under Rs3-10 lakh categories.

Valuations
On account of robust demand in affordable housing segment, Gruh's loan assets are expected to grow at 27 percent CAGR over next 2 years to Rs8832 crore whereas the loan and deposit to grow at 28 percent CAGR for the same period to Rs8270 crore.. We expect net interest income of the company to grow at 24 percent CAGR between 2013-2015E to Rs377 crore whereas the total income is estimated to grow at 31 percent CAGR to Rs424 crore for the same period. The spread on the other hand is likely to be maintained over 4 percent due to its niche presence in rural and semi-urban areas. The company enjoys one of the best NIM in the industry and we believe it would be in the range of 4-5 percent going forward. We also expect company to maintain 100% provisioning despite the introduction of 0.4% provision on standard assets. Albeit Maharashtra and Gujarat would continue to dominate overall geographies, the expansion to other growing states may reduce the share of these states. Though company is available at premium as compared to its peers, we believe due to its unique business model and presence in Semi-Urban and Rural area's of low ticket housing loan, Gruh would continue to trade at premium to its peers. Over and above, high NIM, better spread and superior ROA coupled with strong parental back up also justifies premium valuations. At current price of Rs197, the stock is currently trading 18.0x and 14.1x of its FY14E and FY15E earnings respectively whereas on P/BV, the same is available at 5.6x and 4.3x respectively. We recommend a buy on the stock with price target of Rs241 valuing at 6.8x of its FY14E BV of Rs35.4 providing and upside potential of 22 percent from current level.

~ At current price of Rs197, the stock is currently trading 18.0x and 14.1x of its FY14E and FY15E earnings respectively whereas on P/BV, the same is available at 5.6x and 4.3x respectively. We recommend a buy on the stock with price target of Rs241 valuing at 6.8x of its FY14E BV of Rs35.4.

4 April 15, 2013

SBICAP Securities Limited

Gruh Finance Ltd.

Housing Finance

Industrial Opportunities:
Housing is one of the most basic needs of every individual. Housing sector has strong backwards and forward linkages to over 250 industries and rank 4 in terms of multiplier effect in economy. After agriculture this is the second largest employment generator with 33 million people are associated with the sector (Sources: NHB 2012 report). Due to rapid urbanization (32% of population lives in urban as compared to 28% in 2001) the shortage of urban house stands at 18.8 million units (as per census 2011) ~99% is towards EWS/LIG/MIG. The wide gap between actual demand and supply of housing units is primarily due to rise in urbanization, middle class, rising per capita income whereas on the supply side lack of availability of land and basic infrastructure, declining affordability, legal and regulatory framework hampering the supply. According to the working group of rural housing, for Twelfth five year plan (2012-2017) the estimated shortages of housing is expected to be ~44 million units, nearly 90% of these shortage is with respect to the population below poverty line (BPL). According to KPMG, by 2050 India will add another 900 million people to urban area and rate of urbanization is expected at ~2.1 percent CAGR, double than China.
HOUSING LOAN AS % OF GDP
120 80 40 7 Denmark Malasiya Poland China India Thailand USA UK France Italy 80 86 101

LOAN DISBURSEMENT ACROSS TICKET SIZES (%)

Up to 0.5L 0.5 to 1L 1 to 3L 3 to 5L 5 to 10L Above 10L

87
93 71 58.4

41 23 12 17

29

76.7

76.0

49 27 5 20.3 9.7 8.4 2009 13.6 4.3 1.5 2010 15.1 4.4 2011
Source: Industry

Source: NHB/Industry

Indian Housing Market

The housing finance market plays an important role in bridging the gap between demand and supply. Though, there has been phenomenal growth in housing finance market over the years, the housing loan to GDP ratio ~7% still far below than other emerging economies. One of the main reasons is lack formal source of income for majority of population as more than 60% of Indian population still depend upon agriculture. The current financing mechanism prevalent in the country mostly targets middle and high income sections of the society while the households falling under low income and economically weaker sections category especially from the unorganized work force have no or limited access to housing finance due to seasonal income, lack of collateral, lack of clear title and high transaction cost. HFC's are unable to serve the LIG and MIG categories due to their inability to provide required documentation. Though housing finance market for loan between Rs3-10 lakh is estimated over Rs1 trillion, only 20% of total loan disbursed in FY 2011 were loan in the bracket of 3-10 Lakh.

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April 15, 2013 5

Gruh Finance Ltd.

HOUSING LOAN BREAKUP (%)
Share of HFC's 72.0 54.0 36.0 18.0 FY10 FY11 FY12
Source: NHB/Industry

Housing Finance
OUTSTANDING HOUSING LOAN OF HFC'S
Share of SCB's 56.2 43.8 44.9 55.1
26.0 19.0 12.0 5.0 FY10 FY11 FY12
Source: Industry

Outstaidng Housing Loan (Rs Cr)

Growth (%) 290,000.0 210,000.0 130,000.0 50,000.0

56.9 43.1

Though scheduled commercial banks entered late in the housing finance market, over the years the housing credit from commercial banks has grown rapidly and their current share in overall housing finance market stands at 55 percent as on March 2012. Total credit towards housing loan (Including HFC's and SCB's) has grown at 18 percent CAGR to Rs4.95 trillion since last 3 years, for HFC's the same has clocked over 20 percent CAGR to Rs2.22 trillion whereas housing credit from SCB's the grew 16 percent CAGR to Rs2.73 trillion.

Current regulatory structure helps to mitigate the risk better

After the global meltdown and housing crises in western countries and its subsequent impact on global economy and financial intermediaries, regulators across the world have taken several measures to save the financial market and stop the leakages. Indian housing finance regulator (NHB) has also taken several steps towards exposure limit, asset quality and provisioning norms to better regulate the housing finance companies. NHB for the first time has introduced provision on standard housing and non-housing loan at 0.4 and 1 percent respectively, loan to value (LTV) for individual loan up Rs20 lakh and above Rs20 lakh is fixed at 90 and 80 percent respectively

Loan Value Below 3 Million 3 to 7.5 Million Below 7.5 Million Above 7.5 Million Above 7.5 Million

Loan to Value < 75% < 75% >75% < 75% >75%

Risk Weight (%) 50 75 100 125 125

Source: NHB

Provisioning Norms Standard Housing Loan Standard Non-Housing Loan Doubtful Assets 3 to 15 Months 16 to 27 Months 28 to 51 Months 52 Months and Above Loss Assets

Old Nil Nil 10.0 20.0 30.0 50.0 100.0

New 0.4 1.0 15.0 25.0 40.0 100.0 100.0

Source: NHB

6 April 15, 2013

SBICAP Securities Limited

Gruh Finance Ltd. Various policy initiatives by government to promote housing

The government has set up Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI) to prevent fraud cases involving multiple loans on single immovable property. As on June 2012, 251 institutions including 46 SCB's, 64 RRB's have been registered and 4.83 million of registration of mortgage by deposit title deed has been executed by SCB's and HFC's etc. Interest subvention of 1%: The government in October 2009 introduced 1% interest subvention scheme for the first year for housing loan up to Rs10 lakh where the cost of house does not increase Rs20 lakh. IAY (Indira Awas Yojna) was started in the year 1989 and objective was build 2 million house PA for BPL. This scheme is funded in the ratio of 75:25 by central and state government respectively for all states except Union Territories and North East states. IAY envisages Rs45, 000 loans for construction of home in plain area and Rs48, 500 loans in case hilly areas. Rural Housing Fund (RHF): The government has set Rural Housing Fund to increase the funding towards rural housing and overcome the impediments face by lending institutions. This scheme was started in the year 2008-09 to enable primary lending institution to source fund for lending in rural areas. Till date a total budget support of Rs13, 000 crore is extended under this scheme. During the budget 2013-14, the budgetary support is enhanced to Rs6000 crore. Urban Housing Fund: The Finance Minister in his budget speech 201314 has announced to set up Urban Housing Fund (UHF) to reduce the shortages of urban housing with proposed allocation of Rs2000 crore. Golden Jubilee Rural Housing Finance Scheme (GJRHFS): This scheme was launched in the year 1997 to mark the 50th anniversary of India's independence. The objective was to address the problems associated towards the rural housing finance. This was the first rural housing scheme which was based on market approach without subsidy. There is no ceiling on the quantum of loan provided by banks under the scheme. All loans extended by the banks in rural areas for housing purposes are included under this scheme. Interest Subsidy Scheme for Housing the Urban Poor (ISHUP): The government under Ministry of Housing and Urban Poverty Alleviation (MHUPA ) introduced this scheme to improve the affordability of housing loan for EWS/LIG. Under this scheme an interest subvention of 5% is provided for loan up to Rs1 lakh for entire tenure of loan (15-20 years). Credit risk guarantee fund: The government has introduced this scheme during union budget 2010-11. Under this scheme, the fund will provide credit risk guarantee to the lending institutions against the housing loan up to Rs5 lakh for EWS/LIG in urban areas without requiring any collateral or third party guarantee. All SCB's HFC's, RRB's etc are eligible to take benefit

Housing Finance

~ The scheme is further extended up to March 2013 and raised the housing loan limit to Rs15 lakh and cost of unit to Rs25 lakh.

~Of t ot al Rs1 90 0 crore NHB refinancing by Gruh, Rs700 crore is allocated towards GJRHFS

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April 15, 2013 7

Gruh Finance Ltd.

Housing Finance

Company Background & Business Model:

Gruh Finance Ltd (GFL), a subsidiary of HDFC Ltd., was promoted in the year 1986. The company is a leading small ticket size housing loan provider in tier-2 and Tier-3 cities and town. The company offers loan to individual for both salaried and self employed categories for purchase and construction of dwelling units. Apart from individual under housing categories, Gruh also offer loan to individual under Non- Residential Property and Developers Loan.
BORROWER PROFILE (%)
100.0 75.0 50.0 25.0 4.0 Individual Individual NRP Loan Developers Loan
Source: Company

BRANCH NETWORK
50.0 38.0 26.0 14.0 2.0 Maharashtra Karnataka Rajasthan
4.0

92.0

40

41

14

18 9 7 Chhattisgarh MP 5 Tamil Nadu

Gujarat

Source: Company

Gruh has developed its own credit score model whereas individuals are assessed on 22 credit parameters covering the various aspects like Income, Family, Assets, Liabilities, Savings and Assets creation tendencies. The company predominately based in two states viz Maharashtra and Gujarat and ~70 percent of revenue coming from these two states. In addition to that, it also has presence in other states like MP, Karnataka, Tamil Nadu, Chhattisgarh and Rajasthan. The company is expanding its geographical reach to high growing states especially in Rajasthan, MP and Chhattisgarh. Gruh presently has 134 branches spread across 7 states which is expected to cross 150 in next 2 years due to rapid expansion. The loan fund of the company comprise of term loan from banks, refinancing from NHB, NCD, Commercial Paper and fixed deposit from public. The company also mandatorily maintains 12.5% SLR by investment in approved securities. Of late, the dependence upon banking loan is reducing whereas the refinancing from NHB and share of deposit is rising which helps it to maintain strong NIM and spread above 4 percent level.
BORROWING PROFILE (%) TOTAL BORROWINGS & GROWTH

NHB 12 5 34 49 2012A

Bank Loan 13 4 30 52 2013E 15 4 28 54 2014E

NCD 16 4 25 55 2015E

Deposit
9,000.0 6,500.0 4,000.0 1,500.0

Total Borrowings (Rs Cr)

Growth (%) 30.0 28.0 26.0 24.0

2011A

2012A

2013A

2014E

2015E

Source: SBICAP Securities Research

Source: SBICAP Securities Research

8 April 15, 2013

SBICAP Securities Limited

Gruh Finance Ltd.

Housing Loan Products
Loan Scheme Categories Max. Tenure (Years) LTV (%) Gruh Suraksha Individual 25 85 Gruh Sividha Individual 15 85 Gruh Sajavat Individual 15 85 Gruh Samruddhi Professional 15 85 BUSINESS FLOW

Housing Finance

The company, in order to expand its loan portfolio, has come up with various innovative selling strategies for different borrowers as per their needs. To ensure a deeper geographic reach, GRUH has been sourcing retail business through third party channels by appointing GRUH Referral Associates (GRAs). GRAs only source loans while GRUH retains control over the credit, legal and technical appraisals. Business sourced through GRAs was 58.6 percent of incremental credit for the year FY12 and has paid Rs3.11 crore referral fees. GRUH conducts outreach programmes from each of the retail offices to potential Taluka. The outreach marketing programme also serves as collection centre for collecting installments besides providing services of enquiry handling, file opening and effecting disbursements. The operations are monitored through district head quarters which comprise of 10-15 Taluka's and within Taluka's, the area eligible for development programs. The company deals all collections in cheques and wherever the borrowers do not have bank account, a collection account is open and borrowers have to deposit installment in that account. The company derives nearly 93 percent of revenue from interest on advances followed by fees and other charges and rest from other income. We expect the trend of the revenue composition to be more or less in the same range going forward. The companies over the years have done well to improve its business per employee. Profits per employee have grown at 20 percent CAGR between 2009 to 2012 whereas loan assets have clocked 12 percent CAGR for the same period.
BUSINESS PER EMPLOYEE
Profit Per Emp. (Rs in Lakh) Loan Assets per Emp. (Rs Cr) 32.0 24.5 17.0 9.5 2.0 2009A 2010A 2011A 2012A 14.7 6.1 6.6 7.1 8.6 18.5 20.4 25.4 21.0 17.8 14.6 11.4 8.2 5.0

District Head Quarter

Taluka's

Eligible areas for various development programs

REVENUE COMPOSITION (%)

100.0 75.0 50.0 25.0 -

93

5 Interest Income Fee & Other Charges

2 Other Income

Source: Company

EXPENSES COMPOSITION (%)

100.0 75.0 50.0 25.0 Interest Expenses Employee Expenses Other Operating Expenses 88

Source: SBICAP Securities Research

Source: SBICAP Securities Research

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Gruh Finance Ltd.

Housing Finance

Q4FY13 performance
Particular Revenue from operation Finance Cost Net Interest Income Other Income Total Income Total Operating Expenditure Employee Cost Other Exp. Depreciation Profit Before Provision and Cont. Provision & Contingencies Profit before tax Tax Net Profit Q4FY13 194.2 108.2 86.0 86.0 10.2 4.0 5.7 0.5 75.8 0.9 74.9 11.9 63.1 Q3FY13 166.4 101.6 64.8 0.0 64.8 12.5 6.5 5.4 0.5 52.4 6.4 45.9 17.1 28.9 Q-o-Q % Chng 16.7 6.5 32.7 32.6 (18.2) (39.2) 5.0 3.8 44.7 (86.3) 63.1 (30.5) 118.3 Q4FY12 165.7 88.3 77.5 77.5 9.7 4.2 4.9 0.7 67.8 0.8 67.0 11.4 55.6 Y-o-Y % Chng 17.2 22.7 11.0 11.0 5.4 (4.6) 17.1 (18.2) 11.8 8.6 11.8 3.7 13.5 FY13 650.4 404.4 246.0 0.0 246.0 46.3 23.4 20.9 2.0 199.7 2.9 196.8 50.9 145.9 FY12 514.2 310.1 204.1 0.1 204.1 39.2 19.7 17.2 2.4 165.0 2.2 162.8 42.4 120.3 Y-o-Y % Chng 26.5 30.4 20.6 (85.7) 20.5 18.2 19.1 21.9 (16.5) 21.1 32.9 20.9 20.1 21.2

The company during the full year Y13 has reported 20.6 and 21.1 percent growth in net interest income and PAT to Rs246 and146 crore respectively. The loan asset has clocked 46 percent to Rs5438 crore during FY13 whereas the net interest margin (NIM) has expanded to 5.2 percent from 4.6 percent during previous year. The operating cost to net revenue is further declined to ~19 percent and we expect the trend to continue going forward. The spread too has improved from 4 to 4.5 percent during Q3FY13. The company has declared 125 percent dividend for the year FY13 which translates into dividend payout of 36 percent. The company has maintained CAR of 14.6 percent while the GNPA % is declined to 0.32 percent from 0.52 percent during FY12.

10 April 15, 2013

SBICAP Securities Limited

Gruh Finance Ltd.

Housing Finance

Financials & Valuations:

On account of robust demand in affordable housing segment, Gruh's loan assets are expected to grow at 27 percent CAGR over next 2 years to Rs8832 crore whereas the loan and deposit to grow at 28 percent CAGR for the same period to Rs8270 crore.. We expect net interest income of the company to grow at 24 percent CAGR between 2013A-2015E to Rs377 crore whereas the total income is estimated to grow at 31 percent CAGR to Rs424 crore for the same period. The spread on the other hand is likely to be maintained over 4 percent due to its niche presence in rural and semi-urban areas. The company enjoys one of the best NIM in the industry and we believe it would be in the range of 4-5 percent going forward. We also expect company to maintain 100% provisioning despite the introduction of 0.4% provision on standard assets. Albeit Maharashtra and Gujarat would continue to dominate overall geographies, the expansion to other growing states may reduce the share of these states. Though company is available at premium as compared to its peers, we believe due to its unique business model and presence in Semi-Urban and Rural area's of low ticket housing loan, Gruh would continue to trade at premium to its peers. Over and above, high NIM, better spread and superior ROA coupled with strong parental back up also justifies premium valuations. At current price of Rs197, the stock is currently trading 18.0x and 14.1x of its FY14E and FY15E earnings respectively whereas on P/BV, the same is available at 5.6x and 4.3x respectively. We recommend a buy on the stock with price target of Rs241 valuing at 6.8x of its FY14E BV of Rs35.4 providing and upside potential of 22 percent.
RELATIVE VALUATIONS Particulars NIM (%) ROA (%) Spread (%) PE (x) P/BV (X) GNPA (%) NNPA (%)
data

Gruh Finance 5.2 2.9 4.5 24.1 7.2 0.3 Nil

LIC HF 2.6 1.5 1.7 11.6 2.0 0.4 0.1

GIC HF 2.7 1.4 1.9 6.5 1.2 2.1 Nil

Repco HF 4.2 2.4 3.2 15.9 1.9 1.4 1.0

Valuation is based on TTM Dec.2012 whereas other ratios are based on FY12

NET INTEREST INCOME & NET INTEREST MARGIN

Net Interest Income (Rs Cr) 395.0 280.0 165.0 50.0 FY11A FY12A FY13A FY14E FY15E Net Interest Margin (%) 5.3 5.0 4.7 4.6 4.8 4.8 4.8 4.5 4.3 4.0

5.2

Source: SBICAP Securities Research / Company

AVG. YIELD TO AD., AVG. COST OF BORROWING & SPREAD

Avg Yield to Ad. (%) 16.0 12.5 9.0 5.5 2.0 FY11A FY12A FY13A FY14E FY15E 4.3 4.0 Avg. Cost of Bor(%) 4.5 4.2 4.3 Speard (%) 4.6 4.4 4.2 4.0 3.7 3.5

ROA & ROE

ROA (%) 3.5 34.2 3.0 2.5 2.0 FY11A FY12A FY13A FY14E FY15E 3.1 31.4 3.1 2.9 33.3 3.0 34.7 3.0 ROE (%) 36.0 34.4 34.0 32.0 30.0 28.0

Source: SBICAP Securities Research

Source: SBICAP Securities Research

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Gruh Finance Ltd.

TOTAL OUTSTANDING ADVANCES & GROWTH
Total Outstanding Advances (Rs Cr) 8,800.0 6,600.0 4,400.0 2,200.0 2011A 2012A 2013A 2014E 2015E Growth (%)
20.4

Housing Finance
OPERATING COST / NET REVENUE (%)
Operating cost / Net Revenue (%) 20.0 19.6 19.1 18.7 17.9 FY11A FY12A FY13A FY14E FY15E 18.8 19.3 19.5

40.0 32.0 24.0 16.0 8.0 -

Source: SBICAP Securities Research

Source: SBICAP Securities Research

1 YEAR ROLLING FORWARD PE

Close Price 280 210 140 70 0 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13
Source: SBICAP Securities Research

1 YEAR ROLLING FORWARD P/BV

13.0x 17.5x 22.0x
280 210 140 70 0 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13
Source: SBICAP Securities Research

8.5x

Close Price

2.5x

4.1x

5.7x

7.3x

12 April 15, 2013

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Gruh Finance Ltd.

Housing Finance

Financial Statements (Consolidated):

Income Statement
Particulars Total Income Total Finance Cost Net Revenue Total Expenditure Employee Cost As % of Net Revenue Other Operating Cost As % of Net Revenue Operating Profit Before Prov. Provisioning PBT Tax Net Profit Extra-ordinary Item Adjusted PAT Equity EPS Cash EPS FV BVPS 2011A 361.3 200.9 160.4 32.0 15.7 9.8% 16.3 10.2% 128.3 2.7 125.6 34.1 91.5 91.5 35.2 5.2 5.3 2.0 18.1 2012A 514.0 310.1 203.9 38.9 19.7 9.7% 19.3 9.4% 164.9 2.2 162.8 42.4 120.3 120.3 35.3 6.8 7.0 2.0 21.8 2013A 650.5 404.4 246.0 46.3 23.4 9.5% 22.9 9.3% 199.7 2.9 196.8 50.9 145.9 145.9 35.7 8.2 8.3 2.0 27.5

Figures in Cr.
2014E 844.4 512.5 331.9 64.2 28.3 8.5% 35.9 10.8% 267.7 4.3 263.4 68.5 194.9 194.9 35.7 10.9 11.0 2.0 35.4 2015E 1,065.0 640.9 424.1 82.5 38.7 9.1% 43.8 10.3% 341.6 4.8 336.8 87.6 249.3 249.3 35.7 14.0 14.1 2.0 45.9

Balance Sheet
Particulars Equities & Liabilities Share capital Reserves and surplus Total Shareholder's Fund Non-current liabilities Long-term borrowings Other Non-Current Liabilities Current liabilities Total Liabilities Assets Net Fixed Assets Non-current investments Deff. Tax Assets (Net) Long-term loans and advances Other non-current assets Total Non-Current Assets Current Assets Current Investment Cash and bank balances Short-term loans and advances Other Current Assets Total Current Assets Total Assets 22.2 123.7 30.6 200.0 376.6 3,389.8 0.1 169.5 34.8 284.6 489.1 4,336.1 24.8 22.1 21.7 424.4 493.1 5,600.0 12.2 12.4 9.3 2,977.7 1.6 3,001.0 11.7 24.3 12.0 3,795.7 3.4 3,835.4 11.8 40.3 12.5 5,042.4 5,095.2 2,012.4 33.0 1,026.5 3,389.8 2,834.1 48.6 1,067.8 4,336.1 3,705.8 63.8 1,339.5 5,600.0 35.2 282.8 317.9 35.3 350.3 385.6 35.7 455.3 491.0 2011A 2012A 2013A

Figures in Cr.
2014E 2015E

35.7 596.3 632.0 4,748.2 67.0 1,766.4 7,213.5 14.3 88.2 23.7 6,378.4 6,490.4 160.7 92.0 456.1 708.9 7,213.5

35.7 783.3 819.0 6,068.7 87.5 2,298.5 9,273.7 15.1 146.9 30.5 8,250.0 8,427.3 126.8 117.5 587.0 831.3 9,273.7

Important Ratios:
Return Ratios ROE (%) ROA (%) NIM (%) Op. Profit Margin (%) PAT to Interest Income (%) Cost to Income (%) Earning Ratios Yield on Advances (%) Cost of Borrowing (%) Spread (%) CAR Tier-I (%) Tier-II (%) Total (%) Leverage (Asset / Net Worth) Asset Quality GNPA (Rs Cr) GNPA (%) Provisioning (%) Valuation Ratios PE (x) P/BV (x) Div. Yield (%) 37.8 10.9 1.1 28.9 9.0 1.2 24.1 7.2 1.3 18.0 5.6 1.3 14.1 4.3 1.5 25.7 0.8 100.0 21.2 0.5 100.0 17.4 0.3 100.0 21.5 0.3 100.0 26.6 0.3 100.0 13.0 0.4 13.3 10.7 13.3 0.7 14.0 11.2 12.9 1.6 14.6 11.4 13.1 1.6 14.7 11.4 13.4 1.6 15.0 11.3 11.9 7.6 4.3 13.1 9.1 4.0 13.7 9.2 4.5 13.2 9.0 4.2 13.0 8.7 4.3 2011A 31.4 3.1 4.7 80.0 27.4 20.0 2012A 34.2 3.1 4.6 80.9 25.2 19.1 2013A 33.3 2.9 5.2 81.2 22.4 18.8 2014E 34.7 3.0 4.8 80.7 24.1 19.3 2015E 34.4 3.0 4.8 80.5 24.5 19.5

Source: SBICAP Securities Research

SBICAP Securities Limited

April 15, 2013 13

Gruh Finance Ltd.

Housing Finance

Name Alpesh Porwal Rajesh Gupta

Designation SVP & Head (Retail) Research Analyst

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14 April 15, 2013

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