Investment Outlook – Short Term Pain, Medium Term Gain

November 22, 2016

22nd Nov 2016
Report Type: News Analysis

Recently the global markets have been very volatile and the same is being witnessed in the Indian markets as well. The Sensex has fallen around 12% from peak of 29,045 on 8th Sept, after a 26% rise since the 2016 budget. Here are the key events which have likely affected the mood of the market.

I) Demonetization:

The high value currency notes of Rs 500 and Rs 1000 were demonetized on the 9^th of Nov, 2016. Just overnight 86% of cash in INR has become obsolete. This measure was taken by the govt. to 1) tackle the widespread presence and hoarding of undisclosed (black) money and 2) destroy the counterfeit notes in the economy. A 50 day window till 30^th Dec was given by the govt. to public to deposit or exchange these high value notes.

Per estimates about Rs 14.73 lakh crores is in the form of 500/1000 Re notes, and these will be replaced with new Rs 500/2,000 notes which are being distributed by bank branches /ATMs.
On 22nd Nov, the RBI eased NPA recognition norms as many SMEs, Agri and other business making cash based settlements/transactions could face repayment issues. RBI has given additional 60 day limit for Banks and NBFCs to recognize loans as NPA over and above standard regulatory limits for dues payable between 1st Nov – 31st Dec 2016 in cases where sanctioned limit is below Rs 1 crore.

The Cash categories are:

Daily cash for individuals and businesses: There is a short term pain as people have to wait in queues outside banks and ATMs to deposit, withdraw or exchange money. We expect this to continue in urban areas for 10 days and semi-urban/ rural for another 2 weeks. Already limits are being raised for individuals & businesses. Online /mobile payments are gaining acceptance. New bank accounts will grow; usage of Jan Dhan Yojana accounts has begun.
Black/ undisclosed cash: Over many years, cash has become a massive store of wealth in India. The reasons were convenience and lack of bank accounts on one side, and to avoid tax, under-declare property values, run illegal business, naxalite movement, etc. on the other. It is estimated that 25-40% of above 14.73 lakh crore of cash is undisclosed. This money is expected to either 1) be deposited in bank accounts and declared, accruing taxes and converting to white, 2) Some of this may leak out to other asset classes like currency, gold, real estate, forex and other people’s bank accounts 3) Be destroyed so as not to leave a trail.
Counterfeit / fake currency: There is a reported presence of fake currency in the system, which is debasing the banking operations. By collecting all high value notes and issuing new ones, these will be flushed out of the system. It’s difficult to estimate this type of cash.

Fig 1: Ring out the Old, Ring in the New

Impact: For individuals and in business, there will be some disruption before we limp back to normalcy. This will be worse in rural areas with poor banking penetration.

But 30 years of cumulative black money will in one stroke be converted or destroyed.
This cash exchange, coupled with GST, may radically alter consumer behavior. Bank accounts usage will multiply, as also money transfer facilities and transparency.
The govt. is trying to switch from equilibrium in Tax Non-compliance to one in Compliance. In other words break a vicious circle of saving in black money to a virtuous circle of white money.
The market sentiment in the short term is affected as several cash oriented sectors may be impacted. Real estate, jewellery, microfinance / NBFC and retail operations may be affected. However the new 22nd Nov rule will ease liquidity for NBFCs and allow operations to stabilize.
Data available today indicates the money deposited with banks by customers crossed Rs 6 L crore from Nov 10, after demonetization. Withdrawals, including exchange of old notes, were above of Rs 1.35 L crore (per IBA). We estimate that in another 10 days, the depositing should be complete. The withdrawal / exchange of notes may take 2-3 weeks more to meet daily cash needs.

II) US election results:

Donald Trump won the 45^th US Presidential elections on the 9^th Nov, 2016. This was against the market consensus of various polls indicating a win for Hillary Clinton, thus shocking many Americans and investors worldwide. After the initial surprise, the US markets stabilized.

Impact: We expect the US policies to change once Trump takes over presidency in Jan 2017. The immigration, foreign business treaties, tax rates and a host of domestic policies may change. The impact on Indian investors too will unravel over 6 months. There is a higher uncertainty in US markets. Some FIIs are pulling out funds from Emerging Markets in a Risk off move. However after an initial knee-jerk reaction, this may not continue.

III) Tension along the India – Pak Border:

Indian stock markets fell almost 2% on 29^th Sept, 2016 after the Indian army conducted “surgical strikes” on terror launch pads across the Line of Control (LoC) in Jammu and Kashmir amidst rising tensions between India and Pakistan. Thus the Indian side has taken a firm stand against terror from Pakistan. This event has been followed up with many incidents of firing on both sides and disruptions along the border.

Impact: We feel that there will be ongoing tensions between India and Pakistan. However a war like situation might not come up. Though the issues are unlikely to be solved soon, negotiations and dialogues should happen. Any aggressive attacks from either side could lead to a short term fall in markets. There is a higher uncertainty.

IV) Tata Group Clash:

The Chairman of the Tata Group, Cyrus Mistry was ousted from his post. The past Chairman Ratan Tata took over and will appoint a new Chairman within 2-3 months. The main reason for this was stated to be a loss of confidence in Mistry. This sounded like a painless coup for investors but the spat between the two has gone public, and it may be some time before the changes are rolled out across the group.

Impact: We feel that the operations of most companies will not be affected in the near term. Some strategic direction may be changed. The aggressive and combative stand of Tata group seen in recent cases like Tata Corus and Tata Docomo may soften in line with group philosophy.

Indices movements: Sensex, Nasdaq, S&P 500 and Dow Jones

Fig 2 – Index movements – 1 year

We can see that there has been a fair correlation between Indian and USA markets over 1 year.

Fig 3 – Index movements – 1 week

But over the last week, perhaps thanks to demonetization and the Trump election, Sensex has fallen relative to other markets.

Conclusions

There has been a sharp fall in Indian indices and many stocks from recent peaks. The fall reflects a break in the positive run, an increase in uncertainty and sudden unexpected events. It’s not all bad news. We feel that most of the events are short term disruptions, with a recovery possible in a period of 2 weeks to 3 months.
This is a correction in an overall bull run as we are seeing a lowering of interest rates, positive moves on GST and 7th pay commission and until recently, steady investments from FIIs and domestic retail. The IPO market too has been euphoric with a lot of pent up demand from retail investors.
This short term fall is a buying opportunity if you have a time horizon of a period longer than 3 months.

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Disclaimers

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

SKS Microfinance – a Magical Mix

September 28, 2015September 5, 2017Leave a comment

Date: 01st Sept, 2015
CMP: Rs 457
Mid Cap – with Mkt Cap of Rs 5800 crores
Advice: High risk, high return stock, BUY
Target: Rs 844 by Mar 2017, an 85% appreciation

Summary

Overview: SKS Microfinance is a leader in small business loans for low income people in rural and village areas. State policy changes in AP in 2010 affected operations and SKS plunged into losses. But now the recovery is complete. Total income, NII (Net Interest Income) and Net Profit have grown at 24%, 22% and 36% CAGR over the last 7 years. NPA levels are quite low.

Why buy now: 1) SKS has a magical mix of Social Service and Good Business. 2) It’s a turnaround opportunity that is stabilizing now, and the firm should be able to grow at 40% CAGR over the next 2 years 3) In a recent correction, it has fallen 22% in the last month from a recent high.

The rest of this report is available on this LINK – JainMatrix_SKS Aug 2015

DISCLAIMER

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has a personal shareholding in SKS since Nov 2014. Other than this, JM has no known financial interests in SKS or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. JM has been publishing equity research reports since Nov 2012. JM has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com .

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Bajaj Finance – August 2015

August 19, 2015August 20, 2015Leave a comment

JainMatrix Investments has just published a report on Bajaj Finance. We’ve been tracking this stock since many years. See some of our older reports –

This share has provided 11X returns to shareholders over 5 years, to become one of the best wealth generator mid caps today. We saw this early, and analysed and reported on this. We set bold and aggressive targets in our reports that many readers found incredible. And what happened? The share actually outperformed even our targets !!

So why do you need this report from JainMatrix Investments? Because once again we are bold, aggressive and seeing things early. And high quality research pays for itself many times over.

This report is restricted to subscribers, so visit the Payments Page, become a subscriber to the Investment Service and claim your copy of this report.

Regards,

Punit Jain Founder, JainMatrix Investments

Bajaj Finance – a Firm you can Bank on

June 23, 2014June 23, 2014Leave a comment

Dear Investors,

as part of Investor Rewards Fortnight, JainMatrix Investments is proud to present its second reward – Bajaj Finance – a firm you can Bank on. The entire report is published here, for the first time in public, for your benefit.

Happy Investing,
Punit Jain

JainMatrix Investments

_________________________________________________________________

23-Jan-2014
CMP: Rs 1569
Mid Cap – Mkt Cap 7910 crores
Advice: Buy with a March 2016 target of Rs 3435

JainMatrix Investments presents investors the complete report on Bajaj Finance as part of the Investor Rewards Fortnight.

Bajaj Finance is an NBFC on a rapid growth path. It is a leader in auto and consumer durable loans, and a strong contender for a Banking license. Key strengths are diversified business segments, good product range, broad geographical reach, strong ‘Bajaj’ brand and nimble business model. The performance has been steady in 2013, and operational metrics are good, with low NPAs. Gains can accelerate for Bajaj Finance if the Bank license comes through. Invest in this high potential mid cap.

This is a follow-up report to the one published in Jan 2012, entitled – Bajaj Finance, Auto-matic Growth.

Business Profile

Bajaj Finance (BFL) is a NBFC promoted by Bajaj…

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Bajaj Finance – a Firm you can Bank on

January 23, 2014June 23, 20141 Comment

_________________________________________________________________

23-Jan-2014
CMP: Rs 1569
Mid Cap – Mkt Cap 7910 crores
Advice: Buy with a March 2016 target of Rs 3435

JainMatrix Investments presents investors the complete report on Bajaj Finance as part of the Investor Rewards Fortnight.

This is a follow-up report to the one published in Jan 2012, entitled – Bajaj Finance, Auto-matic Growth.

Business Profile

Bajaj Finance (BFL) is a NBFC promoted by Bajaj Auto 26 years ago. Key management personnel are Rahul Bajaj – Chairman, Sanjiv Bajaj – Non Executive Vice Chairman and Rajeev Jain, CEO.
The total Income in FY13 was Rs 3111 crore and PAT 591 cr.
BFL’s products portfolio includes loans for Consumer Durables, Personal use, Against Property & Securities, for Small Business, Construction Equipment, and Insurance Services. See Figs 1 & 2. About 60% of its business is consumer oriented – B2C, while rest is B2B, with a SME focus.
About 30% of the 2&3 wheelers of Bajaj Auto are today financed by BFL. In the last 6-7 years, BFL has converted itself into a professional, diversified financing company.
BFL has a network of 7,000+ distribution franchise across 112 cities, and 80 lakh plus customers.
In 2013, BFL added 1,565 permanent employees, taking the total employee strength to 3,090. This is a sign of business confidence and investments in expected growth.

Fig 1 – Business Segments, JainMatrix Investments

Funds sourcing – CRISIL has rated it at FAAA/Stable for FDs (high safety on timely payment of interest and principal), A1+ (short-term debt) and AA+/stable (long-term debt) by CRISIL & ICRA.
The share-holding pattern is 62.1% Promoters, and public shareholding includes 11.3% individuals, 10.2% FII’s, mutual funds/UTI 7.9%, and bodies corporate 7.3% and 1.2% others.

Fig 2 – Product offerings, JainMatrix Investments

Recent News and Updates

BFL had a Rights issue in Jan 2013, and raised 750 cr. The issue ratio was 3:19 and pricing Rs 1100.
BFL extended its consumer electronics financing business recently to digital product financing.
BFL also launched a rural financing initiative in 7 branches and 30 spokes in Maharashtra.
The total customers acquired in Q3 FY14 grew by 15%.
The firm’s borrowing mix from banks & money market is 60:40. This appears a balanced mix.
The Bajaj Group has applied for a Bank license from RBI, which is expected to be issued in early 2014. There are totally 25 applicants. BFL is the firm proposed to be converted to a Bank if this application is successful. There may however be a need for a restructuring within the Bajaj group as after getting banking license there cannot be any preferential treatment to Bajaj Auto.
BFL was rated by Aon Hewitt as one of the top employers in India in terms on Employee Satisfaction.
Other business achievements – It is the first NBFC to launch online personal loans. It is among the few NBFC with active co-branded credit card (with Standard Chartered Bank. It is the first NBFC to tie up with UIDAI to access Aadhar card/eKYC database.
The recent Q3FY14 results were good. AUM grew 33% to 22,461 cr; customers acquired during Q3 rose 15% YoY to 9,62,204 and deployments climbed 45% YoY to 7,532 cr.

Industry Note

There are a large number of NBFCs in India (>10,000). These are relatively unregulated companies, unlike Banks that are governed by RBI. In this fragmented market, there is tremendous opportunity to offer Loans and Financial services.
RBI has projected a 14% growth in loans for Banks; NBFCs should have higher industry growth rates of 24% for the next five years. (ICRA/ industry experts).
Inflation and Interest rates are at highs in Q4 of FY14, which is difficult for the sector. However the 2 year outlook is a slow fall in both, even as the investment cycle recovers in India.

Unique Strengths

BFL shares the strong ‘Bajaj’ brand; and is part of the growth of Bajaj Auto through Auto loans. BFL has a wide presence and leadership in high value Consumer Electronics and retail loans.
BFL is diversified across customer segments and geographies; this de-risks operations and inspires a confidence in continued growth. BFL has a presence in 7 business sectors (Fig 1) and is nimble enough to shift focus to the performing sectors in order to achieve its targeted growth.
The group financial services ambitions and new initiatives are going to be routed through BF.
A strong distribution network, spread nationally with presence across customer segments, industries and geographies. The BFL strategy is to diversify their loan exposure with a 30% cap on each segment. This will provide a de-risked business model.
With a wide product portfolio, BFL targets cross-selling and up-selling products to its customer base.

Stock Evaluation, Performance and Returns

Listed since 1994, BFL performed well over the last 6-8 years, as seen in Fig 3.
A sharp fall in price around Jan-Mar ‘13, was caused in part due to the rights issue.

Fig 3 – Share Price History, JainMatrix Investments

The fall we see around August ’13 is linked to the events of 1) threat of stoppage of the Quantitative Easing program in USA, 2) fall in INR v/s USD value. Most Bank share prices in India fell at this time.

Bajaj Finance, Quarterly Growth Growth of Income, Profits, JainMatrix Investments

Fig 4 – Bajaj Finance, Quarterly Growth of Income, Profits – JainMatrix Investments

The Growth of Total Income, Net Interest Income, Net Profits and EPS TTM has been very steady since June 2008, see Fig 4.

Fig 5 – Price, P/BV ratio, Dividends, JainMatrix Investments

The Share price has appreciated by 28% CAGR over the last 9 years. However, post the 2009 fall, the appreciation has been very steep at 86% CAGR over 5 years, mapped in Fig 5.

Fig 6 – Price PE chart, JainMatrix Investments

Price and PE chart Fig 6, indicates that the PE is distributed over a range of 8-32 times, with the 8 year historical average of 20 times.
It shows that PE is currently near all-time lows even though the Price is at all-time highs. It seems the full effect of the Earnings improvements is not yet reflected in the Price.

Fig 7 – Price EPS chart, JainMatrix Investments

The EPS growth has accelerated since 2010, (Fig 7). This is an excellent chart of the firm’s growth. The EPS appears to be in a channel – of blue lines, and on a good growth path.
Dividend yield by the company is 0.95%. Dividend rate has increased steadily over the last 5 years.
We can trace the financial metrics of Return on Net Worth, Return on Capital Employed and Tier 1 Capital Adequacy in Fig 8. ROCE is 16% and RONW is 17.6%, in FY13. These are good ratios.
Today, BFL has a tier-1 capital adequacy ratio at 17.7% (Sept’13). This is at a comfortable level to fund rapid growth and meet the standards for the sector.
NIM has fallen to 11.7% but this is driven by higher share of secured loan products.
Gross NPA increased from 1.14% to 1.15% while net NPAs declined from 0.26% to 0.23 % YoY.

Fig 8 – Financial Metrics, JainMatrix Investments

P/BV is 2.35 today which is a fair level, not overpriced.
The PEG today is at 0.48 – indicates undervalued status.

Risks:

Our base case assumes BFL wins the Banking license, and needs to restructure and invest in itself to re-launch as a bank. The share price will surge post this prestigious win. But in case it does not win this, restructuring costs will be lower and profits higher; but the share price may see some fall.
High Inflation. If the current high inflation in India cannot be tamed, it will affect BFL business.
Our base case is a mild economic recovery in India. However, if the Indian economy continues to show flat or poor growth, the BFL growth will be hit.
Promoter driven consolidation. Bajaj group has other financial firms like Bajaj Allianz (Insurance), Bajaj Financial Solutions (Wealth management and advisory) and Bajaj Finserv. Consolidation will change the outlook and business strategy of BFL.
The worse performing business lines have been Infra and commercial lending, which have been pared down over the last two years. No fresh losses should emerge from this loan book.

Peer benchmarking and Financial Estimates

BFL is compared to some of its peers to understand and benchmark its key ratios. See Exhibit 9.

Exhibit 9 – Peer Benchmarking, JainMatrix Investments

BFL leads in ratios of growth and Returns.
Behind a national major like HDFC, it leads across most parameters.
It appears undervalued at Current Market Price.

Three-year projections of BFL financials indicate a robust ramp up of revenues and profits, Exhibit 10.

Fig 10 – Financial Projections, JainMatrix Investments

Review of Projections from the Jan 2012 report on BFL. While the firm actually exceeded our projections for FY12 and the Profits for FY13 were lower by just 9%, we noticed that the volatility in Banking/ NBFC sector pulled down the valuation & price from our estimates by 35% by end FY13.
In the next 2-3 years, this should reverse and the valuation multiples should rise.

Opinion, Outlook and Recommendation

Indian market is underserved for loans and financial services. Quick calculations show BFL has 2-3% market share among Indian NBFCs (non-Bank). While small, this indicates a big opportunity for BFL.
In India, Consumer debt/ GDP is 9%, low compared to S.Korea 80%, European>50% and China 12%.
BFL is a firm gifted with an outstanding, valuable brand, positive image and good reputation. BFL is well placed to capitalize on this by growing into a financial powerhouse with businesses into insurance, loans and finance.
In the past few years, BFL has embarked on a business trajectory that, if sustained, can make it a top 5 NBFC in 4-5 years. In essence it may move from mid-cap to large-cap, and shareholders could gain considerably.
Invest now and systematically for long-term out-performance.

The projection/ targets for Bajaj Finance are:

March 2015 – Rs 2850 – an 81% gain
March 2016 – Rs 3435 – an 118% gain

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Disclaimer:

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent Financial Expert/Advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

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Repco Home – A Fortune at the bottom of the Pyramid

January 6, 2014September 5, 2017Leave a comment

_________________________________________________________________

06-Jan-2014
CMP: Rs 340
Mid Cap – Mkt Cap 2120 crores
Advice: Buy
Target: 660 by March 2016

Here is a note on Repco Home Finance (RHF). Download the report using the Link – REPCO home finance_JainMatrix Investments_Jan2014

Summary

Repco Home Finance is a Chennai based NBFC. The average loan ticket size is small, and aimed at self-employed and weaker sections of society. Even so, it’s a well-managed firm with Total income, NII and Net Profit growing at 42.6%, 39.7% and 39.6% CAGR over the last 6 years. After the May 2013 IPO the share price has appreciated 98% already. RHF is addressing “the Bottom of the Pyramid” and still doing so with low NPAs and a good NIM. Invest in this firm not just for the growth or profits or share price appreciation, but for the immeasurable social benefits it provides.

Business Profile

Repatriates Cooperative Finance and Development Bank, (REPCO BANK) a Govt. of India firm was set up for supporting the rehabilitation of repatriates from neighboring countries mainly Sri Lanka and Burma. Chennai based Repco Home Finance, (RHF) was promoted by REPCO bank in 2000.
Total Income in FY13 was 406 cr and Profits 80 cr. Its asset under management are at Rs 4035 crore.
RHF focuses on relatively under-penetrated markets, see their business profile in Fig 1.
RHF has 82 branches and 20 satellite centers, majorly in South India, with 64% of loan book from TN. The plan is to grow to 100 branches with new branches in Mah, Gujarat, Orissa and West Bengal.
The M.D of Repco Group including RHF is Mr R. Varadarajan, a career Banker.
Consumer – The average home loan size is Rs 9.8 lakhs given to lower-income self-employed people. The total construction value may be Rs 15 lakhs, for a 1000 sq. ft house. (JainMatrix estimates).

Fig 1 – Business Overview, JainMatrix Investments

RHF follows a lean and efficient business model, with small branches having 2-4 employees with local knowledge, a centralized loan process, no DSA sourcing and totally only 398 employees.
Good ratings post IPO with ICRA (upgraded) AA- and CARE (assigned) AA- rating for RHF long term loans.
Current shareholdings are Promoters 37.4%, FII 6.3%, DII 15.9%, NRIs/Foreign Individuals/Non Resident companies 35.8%, others 4.8%.

Industry Note

There are a large number of NBFCs in India (>10,000). This fragmented market offers big growth opportunities for Home Loans. RBI has projected a 14% growth in loans for Banks; NBFCs should have higher industry growth rates of around 24% for the next five years. (ICRA/ industry experts).
Housing finance companies account for 40% of the retail home loan market. The home loan portfolios of mortgage NBFCs have also grown faster than commercial banks in the last few years.
The top 4-5 companies will have close to 85-90% share of the retail home loans. These firms are HDFC Ltd, LIC Housing Finance, Dewan Housing Finance Corporation and Indiabulls Housing Finance.
RHF addresses a market segment that is underserved, and only addressed by a few micro-finance NBFCs. This is a large and unaddressed, high potential sector.
Inflation and Interest rates are at highs as of now, which is difficult for the sector. However the 2 year outlook is a slow fall in both, even as the investment cycle recovers in India.

jainmatrix investments, repco home finance

Fig 1 – Business Overview

Unique Strengths

Since RHF is promoted by REPCO Bank (a PSU Bank), it should get state govt. support. Repco Bank is part owned by Govt. of India, and TN, AP, Kerala and Karnataka governments.
RHF reaches to the underserved, weaker sections of the society, offering small ticket home loans to self-employed persons. It addresses a segment which is underserved and has high growth potential.
RHF has a strong local presence in Tamil Nadu, and is extending operations to neighboring states.
With a healthy 4% NIM, RHF is profitable while growing fast.
With its lean branches and its presence in Tier 2 and 3 cities, and periphery of Tier 1 cities, RHF has an organisation structure well geared to addressing its current customer segment. RHF shares branches with Repco Bank, thus reducing the cost of operations and having synergies.
Cost of capital was stable for the last 2 years, and loan rates for customers have not been increased.
RHF has conservative lending metrics: LTV (Loan to Value) 65% and IRR 50%. This is a strength.
A personal visit by the researcher to a Repco Bank/ RHF branch indicated courteous service and discussions, a competitive home loan rate and simple but efficient branch environment.

Stock Evaluation, Performance and Returns

RHF was listed recently in April 2013, with an IPO pricing of Rs 172. The Rs 270 crore IPO was a success with 1.62 times over-subscription. It has already appreciated 98% since to date.
RHF has shown very good performance over the last few years, with Total income, NII (Net Interest Income) and Net Profit growing at 42.6%, 39.7% and 39.6% CAGR over the last 6 years. See Fig 2.
A fall in NII% indicates an increase in cost of loans. PAT margins too have fallen from 27% to 20%. However in the backdrop of surging Total Income, this is not worrying.

Fig 2 – Business Financials, JainMatrix Investments

The loan book grew at 38% CAGR from FY-09 to FY-13.
The cost of borrowing of the company is 9.3% which is quite low. The dividend yield is 0.31%.

Fig 3 – Financial Metrics, JainMatrix Investments

From the chart we can see that the NIM ranges between 4-5%. See Fig 3. NIM may have fallen recently, but it is high at 4% levels. It may rise again post IPO.
Gross and Net NPA are within comfort levels at 1.48% and 0.99%.
Post IPO the capital adequacy ratio (CAR) is at very good level of 25.6% which is well above 12% level specified for the sector. RHF has room for loans growth for several years with current capital.

Fig 4 – Price and PE Chart, JainMatrix Investments

Price and PE chart shows that Share Price and PE are fairly in sync. We can see that PE has risen rapidly post IPO from 12 to 22 times and the mean level stands at 17 times. See Fig 4.
ROCE is 11.6% and Return on net worth is 12.6%, these are good ratios.
Its asset under management stood at Rs 4035 crore by H1 FY14, a growth of 30% in 1 year.
PEG is at 0.7 – indicates undervalued status, below the norm of 1.

Peer Benchmarking and Financial Projections

In a benchmarking exercise, we compare RHF with its peers.

Benchmarking

It appears that RHF is overpriced and closer to HDFC Ltd on valuations. However we can see that RHF has good NIMs and lower D/E ratios.
Also on productivity metrics, RHF scores high. This indicates that in the short term, growth can be accelerated by means of hiring.
RHF by virtue of its small size, growth and lack of competition looks well placed.
Bajaj Finance also shows good metrics. See a research report on the same. LINK

Find projections of RHF financials in Exhibit 6.

Projections

Opinion, Outlook and Recommendation

Indian market is underserved for loans and financial services. This is more so in the poorer sections and self-employed of society. RHF has little competition in this segment.
Indications are that RHF will continue to grow its business well. The exit of some Private equity investors post IPO should actually accelerate the profits due to lower costs.
RHF is not just doing a Social Service, but doing so at a healthy profit. In his famous book, “The Fortune at the bottom of the Pyramid” the respected author C K Prahalad turned attention to firms that can do this. We feel RHF is one such company.
RHF has had its IPO only 9 months ago. As the company becomes better known and understood, we feel investors will understand the Social achievements of RHF.
Invest in RHF not just for the growth or profits or share price appreciation, but for the immeasurable social benefits it provides. Invest systematically for long-term out-performance.
Advice: Buy with a Target of Rs 660 by March 2016

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Bajaj Finance, Auto-matic Growth

February 16, 2012March 18, 20143 Comments

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This report was updated on 23rd Jan 2014, find the new report on Link.

Date: 31st Jan 2012
CMP: Rs 723 Mid Cap with Market Cap Rs 2534 crores
Advice: Invest Target: 1750 by 03/13 and 2700 by 03/14

Bajaj Finance is an NBFC on a growth path. It is a leader in auto and consumer durables loans, but customers are spread across Retail 60% and SME/ Corporate 40%. Key strengths are all India reach; strong ‘Bajaj’ brand and rapid entry into new growth segments. Revenue, NII, Net Profit and EPS have grown at 28-41% CAGR over 7 years, and performance did not slow in 2011. Gains can accelerate in a falling interest rate scenario. Invest in this potential multi bagger.

JainMatrix Investments published this report to Subscribers (31/01) and all readers (1/03)

Bajaj Finance – Description and Profile

Bajaj Finance (BF) is a NBFC promoted by Bajaj Auto over 23 years ago. Post a 2008 restructuring, Sanjiv Bajaj is handling the financial services business of Bajaj Auto group, including Bajaj Finance.
BF was set up as a captive financier of Bajaj Auto’s 2 & 3 wheelers. It has now expanded to related areas such as loans for Consumer Durables, Against Property, Small Business, Construction Equipment, Against Securities, Personal Loans, and Insurance Services, see Fig 1.

Fig 1 – Bajaj Finance – Business Segments (click to enlarge)

About 60% of its business is consumer oriented – B2C, while rest is B2B, with a SME focus. The largest Segments are Consumer durable and 2/3 wheelers. BF is diversified across customer segments and geographies; this de-risks operations and inspires a confidence in continued growth.
BF has a network of 4000 distribution partners/ dealers and 225 points of presence. It has 5 million customers across the country.
In 2011, BF added 603 permanent employees, taking total employees to 1657. This is a sign of business confidence and investments in expected growth.
Funds sourcing – CRISIL has rated it at FAAA/Stable for FDs, indicating a high safety with regard to timely payment of interest and principal.
The company has just launched a new loan product specially designed for SMEs, called “flexisaver”. This could be an excellent offering for this segment.
BF has a capital adequacy ratio at 17.5%. This is good. Even so, to fund rapid growth, BF is expected to raise Rs 750 crores in 2013 through a QIP or Private equity route.
Management intends to raise its equity holding to 75% from the current levels. This indicates high ownership, which is good. See Fig2.

Fig 2 – Bajaj Finance – Shareholding Pattern (click)

Another positive is the stake holding from Mutual Funds, FIIs and DIIs.

Industry Note

There are a large number of NBFCs in India (>10,000). These are relatively unregulated companies, unlike Banks that are governed by RBI. In this fragmented market, there is tremendous opportunity to offer Loans and Financial services in a fast growing economy of India, to Individuals (Retail), SME and Corporates.
RBI has projected a 16% growth in loans for Banks; NBFCs should have higher industry growth rates.
Current projections – of fall of interest rate cycle, and lower inflation, is positive for this sector. See article on this Trend.

Unique strengths:

Strong ‘Bajaj’ brand; BF also shares in the growth of Bajaj Auto through the Auto loans service. Also a leader in Consumer Electronics/ durables loans with presence in showrooms of top Retail chains.
With Sanjiv Bajaj at the helm, there is clarity in management succession. He is also a talented and ambitious finance professional and promoter.
A strong distribution network, spread nationally with presence across customer segments, industries and geographies. The BF strategy is to diversify loans with a 30% segment cap. This will provide a de-risked business model.
The group financial services ambitions and new initiatives are going to be routed through BF.

Stock Evaluation, Performance and Returns

Listed long back, BF has shown excellent performance over the last 5-7 years, as seen in the charts.
The Net Profit, Net Interest Income and NII plus Other Income have grown at 28-38% CAGR over 7 years. Growth has really accelerated since 2008. See Fig3.

Fig 3 – Chart with Quarterly Net Income, Profit

Revenues rose over a 7 year period at 41% CAGR; and EPS at 28% CAGR, see Fig 4.
The share has appreciated by 22% CAGR over 7 years. However, post the 2009 fall, the appreciation has been very steep at 112% CAGR.

Fig 4 – Chart with Quarterly Income, EPS

In 3 years, Share Price & dividends have appreciated (Fig 5); P/BV is not too high

Fig 5 – Chart with Price, Dividends, P/BV

Price and PE chart shows that PE is currently at all time lows even though the Price has risen to 700+ levels. It seems the full effect of the Earnings improvement is not yet reflected in the Price, see Fig 6.

Fig 6 – Price and PE Chart

ROCE is 12% and ROE is 19.7%, these are good ratios.
The EPS growth has accelerated since 2008, (Fig 7). This is an excellent chart of the firm’s growth.
Its asset under management stood at Rs 11,919 crore as in Dec’11; as against Rs 6,868 crore a year back (up 74% YoY). The overall credit growth of the company is significant at a time when the entire industry is experiencing a slower credit off-take.

Fig 7 – Price and EPS Chart

Of late, BF has improved asset quality. Its net non-performing asset (NPA) ratio stood at 0.25% in FY12 Q3 as against 0.33% in Q2. Current net NPA is the lowest for the company in the last five years.
PEG is at 0.29 – indicates undervalued status

Peer Benchmarking and Financial Estimates till FY14

BF in this comparison shows better growth characteristics. See Exhibit 8.

BF is also superior due to multiple customer segments – a de-risked business model.
Three-year projections of BF financials indicate a robust ramp up of revenues and profits, Exhibit 9.

Risks:

Interest rates unpredictability. This will affect our growth projections for BF.
Hyper competition. An excessive ramp up/new entrants of NBFCs & Banks can affect BF performance
Promoter driven consolidation. Bajaj group has financial firms like Bajaj Allianz (Insurance), Bajaj Financial Solutions (Wealth mgt) and Bajaj Finserv (Holding Co). Consolidation will change the outlook.
Unpredictable events like a European sovereign default, some new media issue/ bad publicity or any governmental charge sheet, etc. can occur that can mar equity performance for short periods.
Past performance is no indication of future results

Opinion, Outlook and Recommendation

Indian market is underserved for loans and financial services. Quick calculations show BF has 5-7% market share among listed Indian NBFCs (non Bank). While small, this indicates a big market for BF to grow.
In the last three years, BF has embarked on a business trajectory that, if sustained, can make it a top 3 NBFC in 4-6 years. In essence it may move from mid-cap to large-cap, and shareholders could be holding on to a ten bagger.
Invest now and systematically for long-term out-performance.

The projection/ targets for Bajaj Finance are

March 2013 – 1750 – 140% appreciation
March 2014 – 2700 – 270% appreciation

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These reports and documents are prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com . Also see: https://jainmatrix.wordpress.com/disclaimer/

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Business Profile

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Business Profile

Industry Note

Stock Evaluation, Performance and Returns

Risks:

Peer benchmarking and Financial Estimates

Opinion, Outlook and Recommendation

JainMatrix Knowledge Base:

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Summary

Business Profile

Industry Note

Unique Strengths

Stock Evaluation, Performance and Returns

Peer Benchmarking and Financial Projections

Opinion, Outlook and Recommendation

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This report was updated on 23rd Jan 2014, find the new report on Link.

Bajaj Finance – Description and Profile

Industry Note

Unique strengths:

Stock Evaluation, Performance and Returns

Peer Benchmarking and Financial Estimates till FY14

Risks:

Opinion, Outlook and Recommendation

Disclaimer:

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