Reliance Home Finance – Strong growth (50%) momentum to continue over the next 2 to 3 years
Housing finance in India is at an inflection point and is poised for steady, sustained growth over the coming decade. Compared to advanced and even emerging economies, our country’s mortgage penetration is very low, indicating the immense potential for growth. Mid-income affordable housing segment is gathering momentum and the market is estimated to grow to Rs.6.25 trillion by 2022.
The policy push (PMAY, Housing for all by 2022) coupled with low interest rates making the overall housing sector to grow at more than 30%. The leading players are outperforming industry growth rate by growing at 35-50% rate year on year. Reliance Home Finance (RHF) which is subsidiary of Reliance Capital has witnessed 50% CAGR growth in AUM over the last 3 years.
Reliance Home Finance which is recently demerged from its parent company Reliance Capital is going to list on the exchanges tomorrow. According to the scheme of de‐merger all shareholders of Reliance Capital will receive one free share of Reliance Home Finance for one share held in Reliance Capital. Consequently, RHF post listing, will be a subsidiary of Reliance Capital (51% stake; refer chart 1 for shareholding pattern).
The demerger of the home finance business along with separate listing will entail sharper focus and more efficient capital allocation. Large opportunistic landscape and reinvigorated management team will help RHF to sustain growth momentum and help in attaining better return ratios.
RHF has presence across product spectrum (Home Loan, Affordable housing, LAP, Const. Finance) which will help it to capitalize on opportunities. Home Loan segment consists of 35% of total AUM and company is focusing on self-employed and salaried segment. It is also expanding its portfolio in lower ticket affordable housing (19% of AUM). Of 28,200 clients currently, 18000 are affordable housing customers. LAP segment consists of 21% of AUM and construction finance is at 23% of AUM. RHF has built niche LAP portfolio with focus on self-employed segment and it is increasing sourcing from non-metros and focus on retail segments. Company intends to maintain proportion of project finance and targeting high quality developers in non‐metros with smaller
ticket size (<INR100mn) for this segment. Currently, a large part of the book is tilted towards self‐employed non‐professional (SENP) segment (~80%). However, incrementally, 40% is being contributed by the salaried segment.
With the optimal product mix in place, the company is set capitalize on the huge macro opportunity. With focus on retail home loans to sustain riding government’s housing push, along with niche self-employed LAP segment, the company is expected to sustain its 50% growth rate over the next 2 to 3 years. Management target is to boost AUM by >50% taking overall AUM to Rs.500bn by the year FY20.
The company aims to maintain NIM’s(Net Interest Margins) of 3.4‐3.5% over the next two years. In Q1FY18, RHF reported strong NIMs of 3.9% (3.5% in Q4FY17) largely benefitting from lower funding cost (cost benefit due to lower reliance on bank borrowings, down to 39% in Q1FY18 from 73% in FY16, and higher market borrowings, moved from 8% in FY16 to 31% till Q1FY18). As pressure on incremental lending yields crystalizes, we believe that the company can sustain its NIM’s going forward.
RHF has relatively high cost structure with cost/income ratio >40% compared to peers (<20%). This is mainly due to higher DSA dependence and expansion phase. However management has taken cognizance of this and targets to bring cost/income ratio to <25% over the next 2 years given a sharper cost control focus post demerger, focus on productivity and improving income traction, higher digital leverage, sharpened focus on in‐house sourcing (currently >60% by DSAs). On the branches front, management is targeting a rationalized approach—75 branches by FY19 from current 44—and will utilize the hub‐and‐spoke model to expand reach, which is likely to keep cost under control.
Despite focusing on lending to lower-middle income (LMI)and self-employed segments whose credit quality is relatively less, RHF has maintained benign asset quality. Company has reduced GNPL from 1.6% to 0.8% over the last three quarters and is expected to maintain it in between 0.65-0.8% going forward.
With strong growth momentum and better NIM’s, improving cost ratios and stable asset quality, company is targeting RoA of greater than 1.5% over the next couple of years from current 1% levels in FY17.
RHF is well managed company with presence in fast growing housing finance industry. The current net worth of the company post the infusion of capital by Reliance Capital is around Rs.1500cr. The strong growth momentum coupled with improving fundamentals makes the company an attractive bet for the next 3 years. We expect the company to trade at 3-3.5x its book value post listing which comes out to be Rs.4500-5000cr market cap.