Carlyle holds the key post-lock-in!

In a `disclosure era’ Sebi should be monitoring each and every pre-IPO development and enforce adequate disclosures on all price-sensitive information for the benefit of prospective investors. Unfortunately, the regulator has failed miserably in the case of Repco Home Finance!    

OFFER AT A GLANCE
Name	Repco Home Finance Ltd
Public Offer	Fresh issue of 157.20 lakh shares
Offer Price	Between Rs 165 and Rs 172
Offer Amount	Between Rs 259 cr and Rs 270 cr
IPO% on Total Equity	25.3%
Post-IPO Free Float	62.6%
Application Quantity	75 & Multiples of 75
Bid/Offer Opens	March 13, 2013
Bid/Offer Closes	March 15, 2013
Listing	NSE and BSE
IPO Grading	ICRA
Grade	3 out of  5
Lead Manager	SBI Cap, IDFC Cap and JM Financial
Registrars	Karvy Computershare

 

The Offer

Repco Home Finance Limited (RHFL) is making a fresh issue of 1,57,20,262 equity shares of Rs.10 each at a price band of Rs 165 to Rs 172. The offer is being made through 100% book building process wherein not more than 50% of the net issue (less the employee reservation of 1,80,000 shares) would be available for allotment on a proportionate basis to qualified institutional buyers and not less than 35% of the net issue would be available for retail individual bidders. Bidders must apply for a minimum quantity of 75 shares and multiples thereof. The shares are to be listed on the National Stock Exchange and Bombay Stock Exchange.

 

Issue Object

The IPO is expected to significantly improve the overall capitalization profile of the company to support its envisioned growth in the coming years.

 

Parentage

RHFL was promoted in the year 2000 by Repco Bank Limited (RBL), which is a Government of India-owned Cooperative Bank established in the year 1969 to help the repatriates from Sri Lanka, Myanmar, Vietnam and other countries. RBL’s operations are largely in the four Southern states and in the Union Territory of Puducherry. The bank reported a net profit of Rs. 73 crore on a total asset base of Rs. 4,875 cr in fiscal 2012.

RBL currently holds about 50.02% of RHFL equity. During 2007/08, the Carlyle Group, through its Asian arm – Carlyle Asia Growth Fund – infused about Rs 76 cr into RHFL in the form of equity and CCPS. The CCPS were converted to equity in July 2009 consequent to which Carlyle group stake increased to 49.98%. Recently Carlyle has diluted its stake to 23.75% through private bulk sale. As on the date of signing the offer document, WCP Holdings III and Creador 1, LLC were holding 13.33% and 9.99% respectively. The balance 2.91% was widely held by 21 other shareholders. Post-IPO, the promoter bank would hold about 37.4% and the public stake would be 62.6% including the existing non-promoter shareholders.   

 

Business Domain

RHFL is a housing finance company based in Chennai with a network of 68 branches. More than 60 branches are in Tier II and Tier III towns and a significant portion of its portfolio qualifies as rural housing finance making it eligible for low-cost funding from National Housing Bank (NHB). The cost of borrowing from NHB was about 8% in September 2012, while the same from banks stood at about 11%. The company caters more to small borrowers, average ticket size being less than Rs 9 lakh. Also, it lends more to non-salaried borrowers (54%). Its proportion of non-housing loans amounts to only 14%.

RHFL has predominantly used NHB refinance (43% of total borrowings) to fund its disbursements, while the remaining was from various scheduled commercial banks and from the parent company (Repco Bank). As the bank funds are generally linked to the base rate any reduction in the systemic rates is likely to favourably impact the company’s cost of bank funds and vice versa.

 

Financial Track

RHFL has enjoyed a healthy gross interest spread in the past as compared to most of its peers, largely on account of its less penetrated target-market (Tier-II and Tier-III cities). However, the spread has been deteriorating in recent past due to increase in competitive pressures and cost of funds. The company’s yield has remained range-bound at about 12.5-13% during the last two–three years, while the cost of funds has increased from 8.3% in 2010-11 to about 9.5% by September 2012. Consequently, the company’s gross interest spread declined from 4.3% in 2010-11 to 3.1% in September 2012.  

In line with the decline in the gross interest spread, net profitability and return on net worth also shrank over last two years. Nevertheless, the same remained healthy at about 2.4% and 22% respectively for the six month period ended September 30, 2012. At the end of fiscal 2012, RHFL had a loan portfolio of Rs 2,804 cr and posted a net profit of Rs 61 cr on a gross income of Rs 319 cr. During the half year ended September 30, 2012, the company has reported a profit of Rs 36 crore and its loan portfolio stood at Rs 3,098 cr.

 

Prospects

RHFL’s prospects look good as there is a favourable long term demand outlook for mortgage loans due to low penetration of housing finance in India as compared to the developed economies. RHFL’s established presence in the housing finance market especially in Tier-II and Tier-III cities for over a decade, focusing on a niche customer segment, experience of the management team, low cost of finance, healthy profitability indicators, etc., do assure a reasonably secured future for the company. In fact, RHFL’s top management is confident of growing more than 35% in the next few years.

 

Valuation 

In terms of operational parameters, Gruh Finance, which has a strong presence in Gujarat, is a comparable peer for RHFL. Gruh’s current pricing and discounting may make RHFL’s current offer look reasonably priced. Nevertheless, the current discounting of other PSU subsidiaries like Can Fin Homes and GIC Housing gives a feeling that RHFL is over valued.  In fact, purely on dividend yield, GIC Housing looks very attractive.

 

How Repco compares with other home loan companies
CO NAME	M-CAP	P/E	P/BV	P/FV	YLD	PRICE
	(Rs Cr)	(x)			(%)	(Rs)
HDFC	127,718	27.6	5.7	414.4	1.3	828.80
LIC Housing	12,384	12.9	2.2	122.7	1.5	245.40
Gruh Finance	3,673	26.5	7.8	103.2	1.1	206.35
Dewan Housing	2,092	6.0	0.9	17.8	2.0	178.35
GIC Housing	664	7.5	1.2	12.3	3.7	123.30
Can Fin Homes	341	5.7	0.9	16.6	1.5	166.25
Repco Home	1,069	11.8	2.6	17.2	0.6	172.00
	1,026	11.3	2.5	16.5	0.7	165.00

 

Concern

A major factor that could seriously affect the market price of RHFL post-lock-in period is Carlyle’s behaviour. Even while the offer document reveals the average cost of promoter’s holding as only Rs 10 (as compared to the IPO band of Rs 165-172), it is completely silent on the cost of holding of other existing shareholders who are free to dump their stake in the open market after the lapse of the lock-in. According to knowledgeable sources, Carlyle, which held more than 49% at an average cost of less than Rs 50 until 2012, sold more than 26% at a price of Rs 156 a piece this year which makes the average cost of their present holding negative (-70.32). Such price sensitive information does not find a mention in the offer document. So much is the quality of disclosures our Sebi is preaching!