Basant Maheshwari

Kolkata is dull and boring for investors. The land of Tagore and Teresa doesn’t have much to show when it comes to grooming world-class companies, with the exception of ITC, which has a market cap of ₹250,000 crore. Happily, though, as a full-time investor, my work takes me far and wide to get a sense of the companies in which I decide to invest.

Company visits form an important part of my vacations as well. On a holiday to Sikkim, my return was delayed by a day and I got to visit the upcoming Zydus Wellness facility located adjacent to the Teesta river on the way from Gangtok to Siliguri. The diversion from the national highway is just a few kilometres, and the visit was the highlight of the holiday, for me at least. My visits to Kerala have also been interrupted by a stopover at Bengaluru for a sneak peek into Page Industries, the manufacturer of the Jockey brand of innerwear and a company I have held for the past five years. Holiday and work is a deadly combination, but one I have never succeeded in avoiding. 

It was on a trip to Kerala last year that I came across a news brief about Repco Home Finance. The article was quite brief, stating “…a company engaged in the business of providing low ticket mortgage loans has filed its prospectus with Sebi to raise up to ₹200 crore.” Downloading the red herring prospectus now seemed more interesting than checking the famed backwaters. I then called Repco’s Chennai office from the numbers on the prospectus, where the company secretary informed me that the date for the IPO was undecided. Over the next few months I followed up with the company for its IPO, which it eventually did at a cut-off price of ₹172. 

Repco seemed a promising investment, given the strong tailwind for companies catering to semi-urban and rural areas. These areas have seen a strong and steady increase in disposable income in recent years, led by the farm loan waiver of 2008; implementation of the Sixth Pay Commission; NREGA; increase in prices of foods and vegetables, which has transferred money to semi-urban and rural India from the metros; and rise in price of land and gold, which creates a wealth effect in the rural population. Almost 64% of Repco’s loan book originates in Tamil Nadu. It operates with very little competition in its space, since companies such as HDFC and LIC Housing offer loans with a minimum ticket size of ₹15 lakh, while Shriram and M&M Financial look at less than ₹5 lakh, leaving the ₹5-15 lakh market for Repco. Not surprisingly, over the past 10 years, the company has grown its loan book at above 40% and looks set to grow at an annualised rate of more than 30% for the next few years as well. 

However, since self-employed borrowers constitute 54% of Repco’s loan book and these customers have erratic income flows unlike their salaried counterparts, the company’s non-performing asset (NPA) level keeps swinging from quarter to quarter before normalising by the March quarter each year. These NPAs are technical in nature as, in spite of the high growth, the loan loss at ₹3.71 crore is only 0.08% of its total lending of over ₹4,000 crore. The company has recently created an incentive scheme whereby branch managers will be evaluated both for lending as well as for recovery. The idea is to compel employees down the line to focus on recovery based on quarterly timelines. These initiatives should help streamline NPA swings, as has been evident from the quarterly results. 

Digging deeper

I decided to meet the management earlier this year and shot off an e-mail to the company requesting a meeting. When I reached Repco’s office in Chennai, I was taken right away to V Raghu, executive director. He knows his work and seems to be focused on just one thing: making loans at reasonable rates and then recovering it with interest. Raghu emphasised that “growing fast is not a problem as the target segment remains largely untapped”. He buttressed his point by stating that “TN constitutes 18% of India’s mortgage market and if Repco focuses only on this state it is possible to generate a growth of 25% to 30% for the next five years at least.”

When asked about the little headway that Repco has made into other states, the management said the strategy behind venturing into other states is that when Tamil Nadu becomes saturated in a few years, the company would already have the infrastructure ready to scale up its business from other areas. K Ashok, the chief general manager and an old hand, pointed out that Repco had not taken any rate increase for the past two years because growth was profitable and the company was more focused on distribution and penetration.

I later met R Varadarajan, MD, who informed me that Repco Bank, the parent of Repco Home, maintains a zero NPA. He also agreed with my suggestion of retaining the money in the business and growing it rather than distribute it as dividends. Repco sources customers on its own, thus keeping operating costs low at 6% and helps a branch achieve break-even in the first year of operation. The company intends to add 12 to 15 branches to its existing network of 102 branches with a stress on expanding two-thirds of the new ones in niche or untapped areas.

Its credit rating was recently upgraded by Icra to AA- (stable). This enhanced rating will be used to diversify its liability side by issuing debentures and commercial paper and should result in lowering borrowing costs by 25 to 30 basis points. The company’s cost of borrowing has been constant around 9.3%, enabling it to enjoy a spread of 3-4%. Thanks to the IPO fund infusion, the net interest margin shot up to 4.9% in Q2FY14, translating to a spread of 3.1%. The net NPA for the quarter was at 0.92% and is getting smoothened out for quarterly aberrations. A return on assets of around 2.7% without taking any price increase over the past two years leaves the company with enough firepower to weather any storm and a capital adequacy of 24% indicates that its return on equity could move ahead from the current 18%.

Against its issue price of ₹172, the stock is currently trading at ₹292, translating to 12 times estimated FY15 earnings per share of ₹25 and at around 2.1 times projected FY15 book of around ₹140. Given the reasonable valuation and enough room for growth, the stock should do well in 2014 and appears to be a potential multi-bagger.

The writer holds the stock in his personal capacity