Repco Home Finance Limited (REPCO) is tapping the capital markets with its public issue for 157.20 lac shares in a price band of Rs 165-172. The issue has opened on Wednesday the 13th of March and closes on Friday the 15th of March. Earlier the company had made an allocation of 23.31 lac shares to 8 groups involving 12 entities as anchor investors at the top end of the price band. At the end of the second day, the company had received bids for 2.98 lac shares or 0.02%.

Business

Repco is a professionally managed housing finance company headquartered in Chennai, Tamil Nadu. It is 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. Repco is registered as a housing finance company with the NHB, the housing finance regulator of India 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”).

The company as of December 31, 2012, had 73 branches and 19satellite centres located in Tamil Nadu, Karnataka, Andhra Pradesh, Kerala, Maharashtra, Odisha, West Bengal, Gujarat and the Union Territory of Puducherry. Further, as of December 31, 2012, 77 of the branches and satellite centres were located in tier 2 cities and tier 3 cities, and at the peripheries of tier 1 cities, based on the belief that they are underserved by larger HFCs and banks.

In 2007, Repco raised funds aggregating to Rs 75.93crs, by way of an issue of Equity Shares and CCPS to Carlyle, an affiliate of the Carlyle group, a global alternative asset manager. Subsequently, the CCPS have been converted into Equity Shares on July 30, 2009.

The outstanding loan portfolio has grown at a CAGR of 43.81% from Rs 6,550.83 million as of March 31, 2008 toRs28,021.55 million as of March 31, 2012. The outstanding loan portfolio as at March 31, 2012 and as at March 31,2011 was Rs 28,021.55 million and Rs 20,735.22 million, respectively. The outstanding loan portfolio as at September 30, 2012 and September 30, 2011 was Rs 30,978.03 million and Rs 24,286.95 million, respectively. Similarly, the profit after tax has grown at a CAGR of 45.47% from Rs 150.87 million for Fiscal 2008 to Rs 675.64 million for Fiscal 2012. The gross NPA was 2.12% and 1.76% and the net NPA was 1.60% and 1.38% as at September 30, 2012 and September 30, 2011, respectively. The gross NPA was 1.37%, 1.21% and 1.24% and net NPA was 0.95%, 0.95% and 0.97% as at March 31, 2012, 2011 and 2010, respectively. Since loans to non- salaried customers comprise a significant proportion of our outstanding loan portfolio, NPA’s vary during the year.

Objects of the Issue

The net proceeds of the issue would be utilised for augmentation of the capital base which would result in an increase in the net worth and enable Repco to meet the future capital requirements. It maybe mentioned that post this issue the shareholding of the parent in Repco would fall below the majority level to 37.4% and this would constitute as an associate company.

Financials

The revenues from operations of Repco have grown from Rs 1,635.41 million in the year ended March 2010 to Rs 2,255.37 million to Rs 3,188.15 million in March 11 and March 12. In the half year ended September 2012 the revenues have grown to Rs 1,888 million. The net profit after tax in the same period has been Rs 439.69 million, Rs 566.04 million and Rs 675.64 million. In the half year ended September 2012 the net profit is Rs 356.14 million.

One must remember that the company Repco does a dominant portion of its business in the four Southern states and caters to the non-salaried class as well. It also does not finance builders in any way. This business model has its advantages while the presence dominated by South India has its disadvantage in the capital markets.

Comparisons

The company has chosen to compare itself with players like LIC Housing Finance, HDFC, GIC Housing, Dewan Housing and Gruh Finance. While in absolute PE terms, the share is cheaper than HDFC and Gruh Finance, it is more expensively valued than LIC Housing Finance. Even the balance sheet size of LIC Housing and Repco is simply not comparable. The revenues of LIC Housing were over Rs 61,000 million in 2012 versus a mere Rs 3,200 million of Repco. The dilution would take the government holding through the parent bank down to 37.4% making further capital raising difficult. The net profit for the half year if annualised translates into an EPS of Rs 11.45 on the fully diluted capital. The share is being offered in a price band of Rs 165-172 which based on this EPS means a PE of 14.41 at the lower band to 15.02 at the upper band.

The valuation at which Repco is being offered leaves nothing on the table for the short to medium term investor. This makes it only a long term play and one knows that the experience of the Indian investor with IPO’s has been quite bad with roughly three out of four issues trading at a discount to their issue price. Even the last issue from the government NBCC (National Building) took six months before trading at a premium to the issue price. It was a good issue which had fundamentals but the pricing took away the charm and left investors with holes in their pockets.

Concerns and Drivers

The key concerns are about the presence being largely South India dominated and the fact that investments in equity markets come from Western India. The brand being literally unheard off there is no brand recall and therefore makes life difficult to invest in the company. The company gives loans to a large number of self-employed people or non-salaried class people due to which there is lumpiness in the NPA and they have been rising in recent times. With the general strain in the financial sector and the kind of doubling and trebling of bad loans in the banking sector this adds to the stress level.

On the key drivers the biggest advantage that the company would have is the fact that the Union Budget for 2013-14 has provided impetus for first home loan seekers upto Rs 25 lac. The companies average ticket size is currently under Rs 10 lacs and they would we well suited to tap this growth in demand.

Conclusion

Repco is in a challenging business but has its niche market and its own set of challenges. Its margins have been falling over the past few years and as it scales up or grows this business margins would continue to fall. The asking price band of Rs 165-172 leaves nothing on the table for the short to medium term players. Even though one does always say that investing in equity is for the long term, the fact is that short and medium term determines the price. The poor performance of equity in the primary market and also from the government issues leaves little appetite for investment in the primary market. I believe it makes imminent sense to avoid investing in the current market and wait for the share to list, where it would be available at a better price.

SEBI Disclaimer: – I do not intend to subscribe to the above issue.