 "Why Gruh Finance isn't a top pick among analysts anymore")
When the Street was shifting preference from large banks and non-banking financial companies (NBFCs) to their smaller peers in late-2015, Gruh Finance was among the favoured picks given its focus in the affordable housing segment. This was despite valuations remaining steep. Notwithstanding this, analysts remained positive on Gruh in anticipation that swift recovery in loan growth. But when the September 2016 quarter results failed to meet the Street expectations, analysts became more cautious on the stock. Though there is little doubt on Gruh Finance's ability to expand its business in a profitable manner, analysts feel that the historical 30 per cent plus net profit growth and loan book may be difficult to replicate. Apart from its valuations expanding to 12x FY17 price-to-book from 9X in April (thanks to the steep 43 per cent share price appreciation since April 2016 to October 13, when Q2 results were published), a few data points that emerged from Q2 results have made analysts reconsider their stance on the stock. This comes at a time when investors are beginning to ascribe higher valuation to mid-cap stocks. which offer promising growth opportunities.
Firstly, the pace of disbursements slowed in Q2 while net interest margins (NIMs) have seen a gradual compression. In Q2, loan disbursements inched up by a mere two per cent - lowest quarterly growth in the last four years. The conscious cautious approach by Gruh Finance in the loan against property (LAP) segment may keep a check on the pace of loan disbursement in FY17, say analysts. LAP accounts for 11 per cent of Gruh's total loan book, and typically earns higher margins. With this, NIMs at 4.06 per cent in Q2, were at the lower-end of the range seen in last seven quarters and well below the 4.5 per cent seen in March quarter of FY16. There could be more downward pressure on margins, given the lower net interest income growth (up 17 per cent year-on-year in Q2) and LAP focus. Analysts at Motilal Oswal Securities while downgrading their rating on Gruh from 'buy' to 'neutral' post earnings had reduced the earnings per share (EPS) estimates for FY17-18 by 2 per cent, factoring in lower loan growth. Likewise, ICICI Securities also downgraded Gruh Finance from 'reduce' to 'sell'. "The stock trades at such a large premium to the 'right price' that even if business reality sticks to a rosy script of 25 per cent or more self-sustained asset growth, a five-year holding period will reward a new investor with sub-par total returns," the brokerage cautions.
All these explains why very few analysts are bullish on the stock at these levels. In addition to this, as Gruh largely caters to smaller cities where monthly dues are repaid through cash, analysts expect more near- to medium-term headwinds for the stock.
