Repco Home Finance is entering the capital market on 13^th March 2013 through a fresh issue of 1.57 crore equity shares of Rs.10 each, in the price band of Rs. 165 to Rs. 172 per share. The issue will raise Rs. 259 crore and Rs. 270 crore at the lower and upper end of the price band, respectively. Representing 25.29% of the fully diluted post issue paid-up capital of the company, the issue closes on 15^th March.

Chennai headquartered housing finance company promoted by GoI’s The Repatriates Co-operative Finance and Development Bank (Repco Bank) in April 2000, Repco Home Finance has 73 branches and 19 satellite centres, mostly in the tier 2 and tier 3 cities of Tamil Nadu, Karnataka, Andhra Pradesh, Kerala, Maharashtra, Odisha, West Bengal, Gujarat and Puducherry, as of 31st December 2012. The company, providing housing loans with average ticket size of about Rs. 9.5 lakh, has its operations concentrated in South India and essentially in Tamil Nadu, as 64% of its branches are located in that state alone.

For FY12, company reported revenue of Rs. 319 crore and PAT of Rs. 68 crore, resulting in EPS of Rs. 14.55. For 6 months ended 30^th September 2012, its revenues stood at Rs. 189 crore while net profit was Rs. 35.6 crore, resulting in EPS of Rs. 7.67, on equity of Rs. 46.44 crore. Its finance charges as a percentage of revenue have been rising steadily from 55% in FY10 to 66% in H1FY13, thanks to rising cost of funds, due to tightening monetary policy seen across the sector. However, the resultant contraction in NIMs has been severe from 5.26% in FY10 to 3.82% in H1FY13.

Moreover, asset quality, albeit at comfortable levels, has deteriorated, with net NPA as a percentage of net advances expanding from 0.95% as of 31^st March 2012 to 1.60% as of 30^th September 2012. As of 30^th September 2012, company’s networth stood at Rs. 339 crore, resulting in BVPS of Rs. 72.97.

Funds raised via IPO will augment the capital base, the lifeline for any finance company, which will not only strengthen capital adequacy ratio (15.94% as of 30^th September 2012 versus National Housing Bank’s minimum stipulation of 12%) but also provide impetus to further lending. Non-salaried borrower, accounting for 53% of current loan book, will be the target customer for the company, going forward, as this segment is under-penetrated.

Looking at the pre-issue promoter shareholding, promoter Repco Bank held 50.02% equity shares, while PE firm Carlyle 23.75%. However, the promoter being a Government entity, has voting rights of 51%, post transfer of the same by Carlyle, to give former majority control. Other shareholders in the company include WCP Holdings, Creador, Mixon Holdings among others.  

Carlyle had invested Rs. 76 crore via 2 tranches in the company since 2007. While there is no offer for sale by Carlyle in the ensuring IPO, it has sold 46 lakh shares or 9.99% equity stake to Creador, a South East Asia focused Rs 700 crore PE fund, for Rs. 72.4 crore in February 2013 (i.e. just one month back). This secondary sale gives the firm a valuation of about Rs. 731 crore, while now the company is seeking pre-money valuation of Rs. 799 crore, at Rs. 172 per share. Also, Carlyle has sold 62 lakh shares or 13.33% equity in the company, to another PE firm WCP Holdings, after 30^th September 2012, in addition to about 2.78% stake to a host of other entities, further details such as consideration and date, of which are unavailable. Thus, Carlyle has pared its holding by more than half from 49.85% to 23.75% of pre-IPO shareholding.

Estimating Rs. 70 crore as net profit for FY13, leads to an EPS of close to Rs. 15, implying that shares are being issued to the public at a PE multiple of 10.8x and 11.2x, at lower and upper end of the price band respectively. On a price-to-book value basis, the multiples are 1.59x and 1.65x, based on estimated BVPS of Rs. 104, as of 31^st March 2013, on post-money basis.  

Following are the company’s listed peers:

*Closing share price as of 12-Mar-2013, ^ Assuming upper end of price band of Rs.172

Repco cannot be compared with HDFC, LIC Housing Finance or Dewan Housing since these are over 10 times its topline. Can Fin Homes has comparable topline, but its net margins are much lower vis-à-vis Repco. GIC Housing and Gruh Finance are relatively larger in size but have healthy margins, in line with Repco. Thus, PE multiple of 11x and PBV of 1.7x of the issue seem justified.

Giving the healthy growth that the housing finance sector has been witnessing in the past, coupled with strong semi-urban and rural reach that the company has, backed by healthy operating margins, the issue looks good and one can subscribe to it.