Gruh Finance's show suggests valuations are sustainable

Almost zero bad loans, strong loan growth and return ratios are key positives

Against the backdrop of a subdued environment, Gruh Finance’s healthy performance in March quarter (Q4) stands out. On the back of strong growth in retail loans and robust asset quality, its earnings grew 26 per cent year over year to Rs 110 crore, way ahead of Bloomberg consensus estimate of Rs 101 crore. A closer look at the numbers reveals a sharp drop in its provisions and contingencies (for bad loans) - from Rs 6.1 crore a year ago period to Rs 1.35 crore. However, even if one were to consider analysts’ estimates for provisions at Rs 7-8 crore, the profit growth is impressive at over 20 per cent, especially against the backdrop of slowing loan demand. Adjusted for provisions, earnings are largely in line with estimates. 

Stable net interest margins and focus on safer retail loan book are other positives. Despite Gruh’s decision to go slow in riskier segments of loan against property and non-residential property, the loan book has grown 19 per cent year on year. Though growth has moderated from 24 per cent in the first quarter of FY17 to 19 per cent in Q4, incremental loan growth is in a lower-risk segment. Non-retail loans (including developer loans) form a little less than 15 per cent of Gruh’s total loans and have shrunk in Q4, while retail or individual loans have grown a strong 27 per cent. Management has maintained its loan growth guidance of 20 to 25 per cent for FY18, subject to overall credit demand, which is comforting.

Gruh’s net interest margin was largely stable at 4.4 per cent in Q4. “We believe a large part of drop in cost of funds is behind us. While the National Housing Bank’s refinance costs could come down, we do not expect meaningful dip in weighted average cost of funds from here on,” says Sudhin Choksey, managing director and chief executive officer, Gruh Finance. Thus, margins are likely to be largely stable. The movement in provisions is on account of write-backs and reflects the company’s cautious strategy. Choksey explains, “We build up provisions in the earlier quarters of a financial year and write back the excess provisions in the fourth quarter of every year. Fall in our gross non-performing assets (NPAs) is another reason for these write-backs.” Gross NPA ratio stood at 0.3 per cent in Q4 compared to 0.54 per cent in the preceding quarter. Gruh trades at high valuations of 11 times FY18 estimated book value. But, the company stands to gain from its and government’s on high-growth area of affordable housing. 

Strong asset quality, coupled with healthy return ratios (return on equity of 30 per cent) are other factors that can help sustain these valuations. Investors can consider stock on dips.