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Safal Niveshak StockTalk: Gruh Finance

Statutory Warning: This report may cause a reaction, and acting on it can be injurious to your wealth.

Note: This StockTalk analysis has been written by Asif Nadaf.

1. About Gruh Finance
Gruh Finance (formerly Gujarat Rural Housing Corporation Limited) was set up in 1986 by HDFC with the objective of providing institutional structure to rural housing finance. HDFC owns around 60% stake in the company and provides it equity support. Gruh’s major focus is to provide home loans to individuals and families for purchase, construction and extension. It also provides loan for repair and renovation of houses. The company has a distinct target market segment, which complements HDFC’s market.

Association with HDFC
HDFC helps GRUH in many ways which include enabling funding at competitive rates, operational support, management support, operating policy, lending policy, loan sanctioning norms and loan schemes. GRUH benefits immensely by using well-established stringent credit appraisal and monitoring systems and processes, strong risk management systems and efficient recovery mechanisms of HDFC.

Although both GRUH and HDFC operate in the same industry, GRUH focuses primarily in the rural and semi-urban markets. This segment is distinct from HDFC’s target segment. GRUH also cross sells HDFC products.

Nature of Industry
There are three types of industries:

  1. There are industries where only one or two players take away most of the profit eg. Google, Yahoo or NSE and BSE
  2. There are others where nobody makes profits e.g. Airline industry.
  3. Finally, there are industries where every player makes money. Housing finance (HFC) is one of them.

The success of an HFC is very much dependent on two things, as aptly described in the book “The Richest Man in Babylon” – Safety of principal and safety of interest.

Safety of principal is dependent on nature of collateral and value of collateral. Safety of interest is dependent on nature and ability of borrower to make timely payments.

Any HFC faces three broad risks:

1. Market risk is the risk of losses in positions arising from movements in market prices. HFCs face two broad type of market risks. There is adverse movement in price of collateral and high loan to book value (LTV).

After a loan is given, the value of collateral diminishes. For example, a bank gives a home loan of Rs 30 lac and after some time, the value of home declined to Rs 20 lac. In India, given that property prices have continued to rise in the past, HFCs have not faced risk on this account..

LTV is the ratio of loan given against the value of the collateral. The lower the ratio, the lower the market risk. In simple words, the market risk for an HFC reduces when the gap between the market value of collateral and loan taken is large. For example, if for a property worth Rs 50 lac a loan of Rs 20 lac is given, the market risk is low. On the other hand, if for a property worth Rs 50 lac, a loan of Rs 48 lac is given, the market risk is high for the HFC.

In case of Gruh Finance, the LTV is less than 80% for approximately 78% of the properties financed so far and LTV greater than 85% exists only in case of 4% of the properties financed. Therefore, the overall market risk remains low for the company.

2. Credit risk refers to the risk that a borrower will default on any type of debt by failing to make payments which it is obligated to do. The risk is primarily that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs.

Credit risk could be mitigated by stringent credit appraisal of the borrower by HFCs. Credit appraisal looks for ability and willingness of borrower to make timely payment.

Non-performing asset (NPA) is a measure of strength of credit risk policies and processes.

An NPA is defined as a credit facility in respect of which the interest and/or installment of principal has remained ‘past due’ for a specified period of time. In India, an asset is considered an NPA when the HFCs do not receive interest and/or principal for a continuous period of 90 days. If a borrower stops payment of EMI for 3 months, the bank considers the loan (asset) as non-performing.

For Gruh Finance, asset quality remains above industry average due to low gross non-performing assets (Gross NPA) and low Net non-performing assets (Net NPA).

3. Operations risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.

Examples of operational risk include fraud by employees, theft of information, hacking damage, third party theft and forgery, account churning, damage to assets due to disasters, system failure, accounting errors, and negligence. Correct operational risk policies and processes increase asset quality and decreases non-performing assets as seen above.

The profit and NPAs of two HFCs are quite depended on processes and policies defined for each of the above risks. HDFC is the best amongst housing companies for managing each of the three risks. Gruh, being a subsidiary of HDFC, has simply copied the processes and policies for managing the above three risks from its parent.

2. Checklist
I’ve analyzed GRUH by answering a few important questions that span its:

  1. Business performance,
  2. Financial performance,
  3. Management quality, and
  4. Competition.

Before we move ahead, here are the symbols that I’ve placed against each checklist point and that will tell you at a glance whether I have a positive or negative view on that particular point.

   Indicates my positive view

   Indicates my negative view

Let’s get started.

A. Business
1. Can I, in simple words, explain what the company does?
Yes. Gruh is a housing finance company where HDFC owns a 59.7% stake. Its major focus is to provide home loans to individuals and families for purchase, construction and extension in rural and semi-urban India. It also provides loans for repair and renovation of houses. The success of HFCs is highly dependent on managing market risk, credit risk and operational risk. The policies and processes covering these three risks determine both safety of principle and adequate returns.

2. Does the business have high uncertainty?
The inherent nature of Gruh’s business is not uncertain. Once a loan is given, it keeps receiving EMIs for the duration of loan which is usually between 10 to 20 years.

3. Has the business got an enormous moat?
Gruh has a weak moat. However, an HFC’s business comes under the service sector and there is scope for number of players to operate with decent profit. One moat here is switching cost. One incentive to switch to other HFC/bank would be lower interest rate. However, the interest rate of HFCs/banks do not differ significantly to offer this incentive. Also, a borrower who wants to transfer loan to other HFC/bank has to put in lot of efforts in doing the paper work. The pain of going through this paperwork during the switch does not compensate with the gain to be received by extra savings to be made by lower interest rate.

The second advantage for an HFC like Gruh is that the policies and processes designed to manage market, credit and operational risks differ from HFCs to HFCs. Gruh has stringent policies and processes for lending, copied from its parent HDFC, which are best in the industry.

4. Does the business generate strong free cash flow?
Yes. Since Gruh does not have to invest in any plant and machinery and also does not have to hold any receivables or inventory, whatever cash it generates from operations is almost free cash. Most of its assets are free cash and book value closely resembles liquid assets.

As can be seen for the year 2013, the fixed asset of approximately Rs 12 crore is very low compared total asset of Rs 5,600 crore. It means whatever profit after tax is generated (Rs 42 Cr in 2008 to Rs 146 Cr in 2013) is almost free cash.

5. What is the bargaining power of suppliers and buyers?
Gruh borrows from various entities – National Housing Banks, commercial banks, debentures, etc. – to meet its short-term and long-term borrowing requirements. Since the rate of interest charged by all HFCs/banks are not significantly different, the rural and semi-urban borrowers do not have bargaining power.

B. Financial Performance
6. Does the business have a consistent sales and profit growth history and is there room for future growth?
Gruh has an excellent track record of financial performance…

  • Both gross and net NPAs have been one of the best (lowest) in the industry.
  • Net interest margin is high compared to peers
  • Loan assets have been increasing steadily over the years.
  • Average annual growth in Profit after tax has been 28% for the past 6 years, which is quite robust

As far as the future is concerned, given the continuous demand for new residential housing in semi-urban and rural India, I do not see mush problem on the growth front for Gruh, though growth may not be as high as in the past owing to the higher base.

7. Does the company have a good dividend history?
Good enough. In terms of dividend payout (amount of dividend paid as percentage of net profit), Gruh has averaged around 60% over the past 10 years, which is a good payout.

8. Has it got a high and consistent return on equity?
Yes. A company’s return on equity is akin to you earning a certain amount every year on your investments (no paper profits but actual dividend and interest income plus any profit on sale of investments). Looking that way, Gruh’s average return on equity of 27% is a good number. This is reflective of the good yield its investments have earned for it over the years, which has largely been a result of an overall good performance by the stock market.

C. Management Quality
9. Is the management known for its capital allocation skill and integrity?
Being a HDFC group company, there is no doubt that Gruh has a management that considers integrity as a core business value. As far as capital allocation skill is concerned, that is reflected in the good 27% average return on equity the company has earned over the years.

As can be seen, the retained earnings is approximately 60% and balance is distributed as dividend.

10. Has there been any substantial equity dilution in the past?
No. Gruh had seen a 30% increase in its outstanding equity shares in the year 2006-2007. This was on account of rights issue in the ratio of 3:10

11. Are management’s salaries too high?
During the latest year, the Managing Director was paid gross remuneration of Rs 1.7 cr. This is around 1.19% of the company’s net profit and thus not a big figure.

12. What has the management done with the cash in the past?
Gruh has, over the last ten years, distributed around 40% of earnings as dividend and balance was reinvested in the business. The average return on equity has been around 27% and it has increased over the year. It means the, management does not hesitate to return the money to shareholders in the form of dividend, instead of employing them in business when returns are not going to be good.

D. Competition
13. Does the business face high competition?
As of now, not much, as there are not many big players catering to the rural and semi urban market. However, when these markets grow in future, many big players would enter them to gain market share.

14. Has the management focused on market share or profitability in the past?
Looking at good capital allocation decisions, decent return on equity, high asset quality and low NPAs, the management as focused exclusively on profitability.

3. Future Prospects
Gruh operates in seven states – Gujarat, Maharashtra Karnataka, Rajasthan, Madhya Pradesh, Chhattisgarh and Tamil Nadu. The bulk of revenue comes from Gujarat and Maharashtra. These two states accounts for 76% of its loan portfolio. Gruh has a total of 134 retail offices and employees strength of 517 in these seven states.

There is enough room for growth for the company in the future. Gruh has the financial strength and support of its parent HDFC to expand and establish branches in remaining 21 states. Looking at India’s growth story, the future growth in housing finance would come from rural and semi–urban market and Gruh is well establish to take advantage of this opportunity in future.

4. Risk Statement
Gruh’s business, when purchased at a good buying price can provide a great amount of stability to an investor’s portfolio. The one risk that remains very high is the price paid to acquire stocks.

I am not sure after the retirement of Mr. Deepak Parekh, how the new head of HDFC and Gruh would be able to carry the legacy forward. Remember what happened to Infosys after Mr. Narayan Murthy retired; he had to be called back to lead the company after the gap of seven years. Essentially, the company is too much dependent on the vision and management skills of its founder.

5. Financial Snapshot

Disclaimer: I, Asif Nadaf, have no position in the company or in any company related to the promoter group. Readers are advised to do their own independent assessment before taking any decision. You can expect some errors or forward looking statements, so do your own research as well.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.


  1. Thanks Asif. This is a nice summary. Key aspect around valuations seems to be missing. Any views on that?


    • Surya Kanth says:

      Earlier I used to do a Big Mistake of defining valuations for a stock. Let us take the example of the same GRUH finance: They have a consistent growth profile with 40% payout. and There are very few HFC’s in india with the Kind of Loan portfolio Gruh maintains. What I mean to say is There is big predictability and there is High trust on the Management which protects the downside. But a major question to ask is Is the demand for the stock increasing. As the demand for the stock increases the PE ratio may jump to 40 or 60 also. With Housing being the fastest growing sectors in india, There is a big demand for housing loans and that is why we see companies like GRUH and REPCO show 25-30% profit growth in tough times also. With their cost-to-income at 19% they have a very good scope to improve margins and get a profit growth of 30-35%. As more people recognise the ‘Steady Compounding’ nature of GRUH, there will be more demand for the stock, And Moreover the trend in Low-ticket Housing has just started. So I don’t think It is necessarily expensive. As always, I like Catching up long-term sustainable trends. GRUH is One of the best stocks to keep in a portfolio. And for a non-cyclical, long-term, steady-compounder you don’t need an exit strategy unless there is some big hit.

      • As more people recognise the ‘Steady Compounding’ nature of GRUH, there will be more demand for the stock … bhaiya everybody knows its best stocks and already reflected in valuation…whats point in buying at high valuation even if comapny is good

        • Surya Kanth says:

          Ok I will give my valuation: But before that let me ask some questions:
          1. What is the confidence on the Profit growth rate of 25-30% in GRUH finance for the next 3-4 yrs?
          Considering the trend, I think it started somewhere in 2010, I think 25-30% is possible.
          2. What is the value you give to the management?
          High. Especially in financials we must pick stocks with excellent management.
          3. What is the downside risk to the current PE ratio?
          Considering the growth and mangement pedigree I think there is only 10-15% downside. I don’t think GRUH will be avaialble at 10-15 PE ratio in the near future Unless there is a big systemic collapse.
          You can answer yourself the same questions. The analysis I prepared some six months back is the same thing like Asif. Facts are the same.
          Now coming back, if earnings grow at 25-30%, dividends grow at the same rate since they have a high consistency there. Current yield is 1.5% and expected to grow at 25-30%. If current PE ratio stays there, You will make better than 25-30% compounded. Right???
          With downside risk in place also you will make better than 20% with a good sleep.
          Now for the upside:
          1. The stock is not a high growth stock, But still they have a scope to increase their ROE. Their Parent HDFC has cost-to-income of 8% and GRUH has 19%. There is lot of scope for improvement. And their borrowing cost is vulnerable to interest rates but with increase in deposits I think there will be some sustainability. Think about this As the company becomes bigger, The employee cost will reduce. To what extent it reduces is the thing to watch out.
          2. As the ROE increases the stock becomes more ‘Safer’ and people buy more. I will not say that the PE will double hereafter but I feel that there is significant chance of improvement.
          I don’t think in terms of multibaggers to tell you the truth, I give myself a target of >30% compounded and try to outperform it.

    • Well Ashish,

      I tried to put my most correct opinion. However, the valuation part won’t be most correct opinion. I leave valuation upto you guys to decide.

      However, I believe, as others in this form,

      1. The stock is overvalued with PE 25 and PB of 7.5. At current price, there is no safety of principle and guarantee of adequate returns.
      2. There is lot of room for growth as well as competition in future
      3. It is one of the best managed HFCs in India and would remain so, unless management does something very wrong

      I would buy this stock only if is available at discount to book value (mostly cash) considering good growth and low NPA remains else would not touch it all my life.

      • Surya Kanth says:

        Their book value is messed up. When they distribute 40% as dividends how will they have a higher book value. The P/B ratio is not suitable for valuation. I think from a PE perspective the valuations are not stretched. Have you read the article of Sanjay bakshi ‘Pay up for Quality….’ I am a fan of Sanjay bakshi with respect to the gems he picked up. Like Hawkins, Like VST industries, Like Nesco etc…. Gruh Finance is one such stock to pay up for quality I believe.

      • SG Jaclyn says:

        Hi Asif,

        Good analysis.

        1. While the current PE may be in the region of 25, it doesn’t mean it is expensive. If the company continues to grow at the same rate for several years (which is a possibility) the current purchase price would become irrelevant and ROE would simply make it value buy. Charles Munger quote “… if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result” aptly captures that. Anyway, as you mentioned, I myself is not exactly comfortable to invest at the current price and would like to wait for a better opportunity. By doing that, we may be missing out on a great opportunity, if the price never corrects.
        2. PB should not be used a valuation tool for investing even for financial sector company. My learning is that, for a company which has good RoA (in Gruh’s case extremely good touching nearly 3.00%) and trades at good earnings multiple, then it is worth buying. On this basis, STFC is a value buy (RoA = 3.46, PE = 9.69 & PB = 1.93).

        • Hi Jaclyn,

          My two cents on this…

          There is possibility that it will earn 18%+and there are ifs and buts……One thing is certain, any company which grows with 18%+ growth over invested capital, will attract lot of competition from banks and other HFCs and what would stop other banks / HFCs from eating Gruh’s market share???

          If it grows 18%+ and fends off competition, then what Charles Munger says is correct. Here keeping competitors at bay is important, which in opinion, Gruh would not be able to do so.

          And over these many years, if something bad happens like next recession, then it may be available at who knows 10 times or 15 times PE, which was the case with Gruh finance in 2008. We would regret this purchase during next recession.

          For me safety of principle is most important and then comes adequate returns.

          • Surya kanth says:

            Well there is enough competition even now. But you cannot compare the market for Pressure cooker and market for Housing finance for example. In the Pressure cooker market, You need to fight for an average volume at a higher price. With increasing competition, you may find it tough to maintain prices. In the case of GRUH, the base is still very low and Growth becomes vulnerable may be after 50000 cr AUM. The volume of demand is so high in the case of both banks and NBFC’s that there could be more competition. But one point more. HFC’s are taking aways market share for Banks and Private Banks are taking away market share from PSU’s.
            Regarding 2008 prices… Then there was no trend for Housing finance. It started somewhere in 2010-2011. ONE IMPORTANT POINT: FOR MAKING MONEY IN FINANCIAL STOCKS, A PROPER INTEREST RATE SCENARIO IS ALWAYS NEEDED. Not just the best business.

  2. The dilemma with Gruh has always been the price you are willing to pay for its pedigree and growth potential…..I guess its one of those stocks which you buy expensive and wait for the growth to catch up….Like Ashish says, some talk on valuation here should be helpful…..Thank you Asif and Vishal for putting this up

  3. Thank you for the easy to understand and through analysis.
    One of the risks housing finance companies would face is the asset liability mismatch i.e. tenor and cost of the funds raised by it vs the repayment tenor and interest rate (floating vs fixed) if its loans.
    However, with many companies in this industry and almost all making decent returns I guess the above is well managed/ manageable.
    I think this industry has a secular growth future in India given the acute shortage of housing which implies demand and higher value of underlying asset.
    However, these two assumptions in the US (although the context would be different and I don’t think there would have been an acute shortage there, it possibly was sheer greed) led to one of the largest economic collapses in 2008 !!

    • Very well said Sudhir,

      Both your points, affect profitability, as HFCs, may need to borrow at higher cost in the time of distress.

      //One of the risks housing finance companies would face is the asset liability mismatch i.e. tenor //
      Regarding your first concern, Asset liability management (ALM) would be an issue for big HFCs / Banks. For example, SBI with a loan portfolio of close to Rs. 10.5 lacs crore, would face issues in raising funds from the market to fix asset liability mismatch. Compare this with total debt of Rs. 5500 crore of GRUH Finance, Gruh would find many lender to meet its ALM needs. Gruh also has backing of HDFC with loan portfolio of close to Rs. 1.75 lacs crore. Considering its small size, as per my opinion it should not face problems in fixing asset liability mismatch.

      If an HFC does better asset liability management, it would be reflected in its net interest margin to average assets. As shown in diagram – key financial ratios, we can certainly agree that Net interest margin (NIM) of close to 4% is one of the best in the industry.

      //cost of the funds raised by it vs the repayment tenor and interest rate (floating vs fixed) //
      Regarding your second concern, NIM of close to 4% reflects that it is doing good job in this front.

      And finally,
      I am very optimistic about quality and growth of GRUH (as reflected in my views :)) but very pessimist about its current price. This stock is a big No for value investors at current level.

  4. nice write up sir, only q wud be its always traded at a bv of more than 4-5 which is exps but gud things dnt come up cheap so mayb we can have a bit of exposure to the stock to start with & increase the allocation in case it falls.

    • Right Jugal,

      However, Good things do come cheap, but once or twice in our life time. So, the trick is to track good number quality stocks and to “sit tight till the price is right”

      • Surya Kanth says:

        Yes Good things do come cheap. But only when the growth is gone. Infosys I think never traded at 10 PE ratio during high growth phase. Now when the growth is clipped It still has buyers at 15 PE ratio.

  5. Tirthankar Ray says:

    Only few questions on Gruh’s business :
    1) What is the current mass of bad loans incurred by Gruh?
    2) How you see the rate of default going forward in Gruh’s portfolio?( i.e An Estimation Growth rate of defaults )
    3) What customer segment they are catering to & in what ratio ? ( Say, Loan given to group of real estate investors V/s Individuals. )

    • Surya Kanth says:

      1 and 2) Generally Housing Loans are the form of loans with lowest risk. Even if you see the latest news NHB has reduced the risk weights on Housing Loans. To answer your question NET NPA of GRUH is zero. and Gross NPA is 0.46%. Growth rate of defaults is the least thing to watch out. I would look at borrowing cost and cost-to-income ratio.
      3) They cater msotly to individuals almost 98% as far as I remember.

      • Tirthankar Ray says:

        Why I asked for Growth rate of defaults?
        In a bad economy , how fast defaults can happen and how fast defaults can be catastrophic to the business we need understand . The problem is defaults follow a non linear pattern , so you would never get an opportunity for correction.
        Why I asked for granularity of data to customer segmentation data?
        NPA cannot be seen by averaging across all customer segments. ( Flaw of Averages ). Cost to Income is a nice ratio but income should not roll up to average.

        • Surya Kanth says:

          Let me tell you something: There is difference between the way I look at HDFC bank and ALLAHABAD bank for example. HDFC bank with all its retail book and almost zero NPA is where NPA has been forgotten by investors. So a change from o.2 to 0.5 NPA would not reduce the demand for HDFC bank stock. But NPA is a major determinant in the case of ALLAHABAD bank. I think you got this major distinction. PRIVATE BANKS are valued by growth. Public banks are valued by NPA’s. Where do you put GRUH? I put it in Growth-case. So I dont worry too much about NPA and its analysis or its pattern.
          One more thing My uncle is a real-estate businessman. He tells me ‘You never understood an investment unless you understood how the market values it.’
          I am not saying that It is wrong to ask questions, But my mental model is completely different to what i have seen in Safal Niveshak. I thought I could add something here and learn from many people.
          Personally Most of the stocks discussed here are not the ones i would own…. except some like CERA, Godrej consumer and GRUH. CERA is one stock which is in the housing trend but i prefer a market leader like Kajaria. I have 46% of my portfolio in (GRUH, Repco)
          and when i bet, i bet on certainities and I bet heavily (A concentrated investor: I hold 4-5 stocks.)

      • Tirthankar,

        You would find answers to your 1 & 2 question under market risk, credit and operational risk in my stalk talk above. I would be repeating myself in comment section. Surya has expanded it further.

        Regarding your 3rd question, Thanks Surya for answering this //They cater mostly to individuals almost 98% as far as I remember.//

        To add to Surya’s point, average loan size is less 10 lacs per dwelling. This also reduces risk of GRUH as loan portfolio is well diversified.

  6. Sanjay Sharma says:

    This forum does good analysis of stocks, but after doing analysis stocks start falling. I think good stocks just wait when safal niveshak is going to put its analysis and after that start falling. We have to keep our finger crossed for this one.

    • Surya Kanth says:

      As you said, This forum only does analysis. And moreover the analysis is not dynamic. But Safal Niveshak is a good place to talk. Here I didn’t find an overall strategy. Personally I hate Ben graham/munger/buffet trio. To some extent Buffett is OK. I am a fan of Peter Lynch and Jesse Livermore.
      The funniest point is this: Many places when thet talk about Ben Graham, they talk about ‘Return of Capital’ and satisfactory return. I read Intelligent investor at 19. I am 24 now. I liked it then. but I hate it today. Becuase, If ‘Return of capital’ is the target why should I go for market, I will go for FD. And sleep happily. It is funny to learn 1600 pages of books and doing 2 yr course in Safal Niveshak to learn protecting capital. At the age of 20 I decided to learn How to compound money at more than 30% without losing most of it.
      For a small Investor, who puts 5000-10000 rs a month, I would not give a damn to get 15% in return from market when I get 10% in FD. 20% is ok But still not a great stuff. I thought anything in excess of 30% will be would leave me very rich.
      I dont want to hurt the sentiments of anyone here but that is how i think. And that is how I invested in Indusind bank in 2010 and made 35% (I think Indusind bank is set to become one of best private banks in india and maybe by 2015 i will make a six-bagger.)and My father invested in dena bank (A fan of Margin of safety blah blah) and didn’t make money long-term.

      • // If ‘Return of capital’ is the target why should I go for market, I will go for FD.//

        Well Surya, if “return of capital” is not the target, you may as well go to a casino and earn > 30%. And why settle for just 30%? 🙂

        My point is – don’t look at an annual return of 15% in isolation. Look at it in terms of compounding over 15-20 years.

        By the way, great to see you enthusiasm in sharing your returns (and your tip) on Indusind Bank, but I am sure you are aware and also careful of “beginner’s luck“, because it works nowhere better than in the stock market.

        Now, my only worry is someone reading your comment buying Indusind Bank because you said it will be a six-bagger, and then cursing you when it doesn’t.

        Finally, if you are not a fan of “margin of safety”, you may get frustrated with what you read on SN going forward as well.

        • Surya Kanth says:

          On your casino part:
          1. See Every Asset class needs its own ‘Mental Models’. There should be ways to make 30% returns in real estate, Casinos, commodities etc… I don’t know all of them. From 19 I got interested in equities and I stay with them. I am not very big investor to have multiple asset classes.

          On ‘Return of Capital’:
          Perhaps It is beginners luck in case of Indusind, I would accept it. But all the things I have learnt at multiple levels did not put me in trouble. I think hard to pick a stock I think less to act on a stock after I pick it.
          See there are many trends going in the market, Lets take the ‘cable digitisation trend’ that started in 2012. I did not find any business in the trend with proper fundamentals excpet Zee entertainment Following the trend may fetch me good returns, But I did not understand the downside risk. So I also think about return of capital but in a different way.

          On IndusInd and Gruh finance too:
          A caution for readers: BORROWED CONVICTION IS MORE DANGEROUS THAN BORROWED CAPITAL. And I said a six-bagger to me. But not from current price.
          And If I lose I worry more about losses than curses.

          Why Settle for 30%?
          That’s the worst case. I always like to give myself lower targets and outperform them. Funny thing is In school I used to tell everybody about getting third rank and I used to get first rank. So my neighbours think I am an outperformer.

          On ‘Margin of Safety’:
          I think differently. Let’s take Engineers India whose profits are dipping. How is that safe??? When is Engineers India going to show profits??? I don’t know. But even if it shows straight two quarter profit growth, What if Market has forever shunned Government Stocks???
          My strategy is Since it is a market leader, in Engineering consulting, I will buy for 5-10% of my portfolio when They show two quarter profit growth, by that time Stock will be selling at 200-220. Because Markets react first and reasons come next. That is fine. I am now confident of the trend. I mean I am just giving example, reality might be different.

          That is how I do. Because you have to be extremely right when you are going contrary. You pick up a wrong stock, Even they show Profit growth, Market is likely to put only 5-7 PE ratio sometimes. For example, even in current housing trend, DHFL is a stock which I got very curious. The stock is showing 25% profit growth, but still valued at 5 PE. WHY??? Is there something wrong???? Yes. The management Integrity. Now it is crazy going contrary here.
          Anyway I am sorry If I hurt you. I dont mind arguments. I mind No arguments. Thank you.

    • Hey Sanjay, hope you have not bought Gruh after reading this above analysis.

      Well, going by history of analyses on SN, as you have so well captured in your comment, you may do well to short the stock. 🙂

      Now, isn’t that a great thing about SN reports? They give you a chance to do the contrary and succeed each time. 🙂 So all the best!

      • Sanjay Sharma says:

        Vishal, thanks for your response. I have just put my comments in lighter note reading some of the comments on other stock analysis. Its true we can at best do stock analysis based on history and fundamentals but luck plays a very important role in stock return (even this fact is admitted by Ben Graham in his book Intelligent Investor where he admits thats his return from single investment GEICO which he bought by chance has created more return for him then his 25 years of investment analysis). Personally i feel that in place of stock market stuffs, you can be better at life management skills.

        • Thank you Sanjay for your suggestion of replacing my stock market stuff with life management skills. Investing is, after all, just a minute extension of our life. 🙂

          By the way, Graham and Buffett, and many others like them, have proved that luck, like love is a verb.

          You have to do the hard work to get lucky. This works well in stock market investing as well.

      • Surya Kanth says:

        Sorry to say this, but Please don’t put Buy/Sell decision on somebody’s analysis. Here I and Asif have presented our case, I think it is fair, If the readers think about it and make their own decision. In the whole set of arguments I NEVER ASKED ANYONE TO BUY the stock. There are many Blogs But I give SN higher value because of the intellectual rigour in the arguments. The discerning readership of SN, I believe, will take a decision based on their own analysis. Otherwise It is just like acting on tips. If you put a simple ‘Don’t buy’, It stops the reader from analysis.

  7. But if these finance companies delay the process of declaring NPA by extending payment terms to more than normal?

  8. And there lies the problem. There is a lot of difference between what we think, and what we know. I feel in times like this it is better to delay judgement on NPAs and wait till the next set of results are released.

  9. Surya, it is one style of investing which you follow. It does not need to be the best style possible.

    Investing has to be in sync with one’s own personal characteristics. if it suits you then it is good but it will not suit everyone. Peter Lynch himself owned a diversified portfolio. It is all about not loosing capital and getting a inflation adjusted return on one’s own investment. It is the sustainability of returns that is more important than only returns.

    There could be RJ,RD advocating concentrated portfolios but we also have Prashant Jain, Sankaren Naren and Sivasubramanian who have been generating 20+% CAGR consistently with so many restrictions and regulations.
    I read somewhere in web that even magic formula generated 27% CAGR when backtested. So it is all about your style and how you convert your conviction into success is what is required in equity investing.

    Hope you would also know Sir John Templeton’s maxims. Yes SN discusses about boring stocks which is the only reason why I visit this site quite often.

    There is no logic called concentration and diversification. Returns are nothing but weighted average of return of individual stocks. I can have 20 stocks which can grow 30% and still make 30% CAGR or have 5 stocks and each making 10% returns and have 10% CAGR but the same rule applies to failure. If I am wrong with one of my stock selection, I would lose more in concentrated portfolio.

    The stocks you mentioned will fall under single theme called consumption.Would you buy HDFC bank or IndusInd if they plan to have only one loan portfolio where the returns are high. Why would the banks need to be diversified in their loan portfolio? The same reason is to be applied to personal equity portfolio. What happened to folks who were confident of secular growth story of Titan.

    Regarding Housing loan companies, people are crazy about real estate now. I dont think this is sustainable at all. Now bulk hiring by IT biggies has become almost nil. With inflation in India at around 8% and in US at 2%, please let me whether we will be able to sustain our pricing power in IT 🙂

    Let us look at sectors which have contributed to India’s growth in last decade.

    Infra – whole sector is in doldrums
    RealEstate – Depends on IT, BFSI employees in retail segment
    Banking – Depends on IT, BFSI employees (particularly private banks)
    IT- Depends on low cost structure which will anyway disappear slowly due to higher inflation in India

    The above three sectors drive housing growth in India which in turn narrows down to IT. Now with IT slowly fading away, I doubt there will be a secular long term growth in housing.

    If 2008 like situation occurs, there will be huge defaults in housing loans. Indirect beneficiary of India’s growth (target customer of Gruh, Repco will also default). Suppose if I default, how can I expect my servant, cable operator to make prompt payments. Microfinance is very risky and I would request everyone not to have too much optimism about it. Yes, I agree there is a lot of money to be made in this section but one should not bet too much.

    One buffet quote “You only find out who is swimming naked when the tide goes out” to end.

    My intention is not to hurt anyone and say which is correct. Just wanted to share some info from my side. I may be wrong also 🙂

    P.S: Sorry if there are type or grammatical errors, I have typed this from my phone.

    • Surya Kanth says:

      My Manifesto is ‘Make Money.’ I think it doesn’t matter what style I follow.

      • Surya kanth says:

        I did not see it before. I was an Investor in TITAN. I made good money. But I am not a ‘buy and sleep’ investor. I sold titan somewhere in April before the famous 25% fall. My good friends in IIM bangalore were simply waiting. They made money even after the fall. I was a bit late to the party. But I was quick to come out. To tell you the truth, I do not know what is CAD. It was very easy for me to understand that Gold is an unproductive asset and definitely not a utility product like housing so the first one they would scrapping is Gold imports. It is very unfortunate that TITAN had to face such a very bad headwinds. I thought ‘Business stays there but Stock is finished.’ I came out and incidentally RBI banned Gold on lease. It is simple. TITAN’s business model was busted.
        With the recent ‘Playing attitude’ of RBI I am not sure if TITAN gets the same PE even after RBI completely reverses its policy decisions. But TITAN’s business model was Phenomenal. Tanishq has an ROCE of 109% because of its very low Capex. They can grow faster than every gold business in the market without corresponding large incremental Capex. Perfect metaphor for making multibagger returns. But FATE is FATE.

  10. Saurav Jalan says:

    In some of the comments, people were proudly rationalizing why they don’t find Graham and Buffett smart enough to suit their investment style. Well everybody has a right to voice their opinion but just to share some facts. People who invested $10,000 dollars in Buffett Partnership in 1956 and had stayed with him till 2011 their wealth would have grown to roughly $500 million dollars. That’s 21.74% CAGR for 55 years ! and to produce such returns for such a long time frame is not a joke. Many people might have created wealth in the history but very few would have created with so much character, ethics, humility and detachment as Buffett.

    It’s very easy to become proud of our puny success and destroy all the wealth which we have created through intelligence,hard work or plain luck. I think if we haven’t learnt the virtue of humility by being in the investment business then we haven’t learnt even 10% of this profession.
    I did not know anything about Jesse Livermore before writing this post but I saw his Wikipedia profile and came across this :

    “During his lifetime, Livermore gained and lost several multi-million dollar fortunes. Most notably, he was worth $3 million and $100 million after the 1907 and 1929 market crashes, respectively. He subsequently lost both fortunes. Apart from his success as a securities speculator, Livermore left traders a working philosophy for trading securities that emphasizes increasing the size of one’s position as it goes in the right direction and cutting losses quickly.

    Livermore sometimes did not follow his own rules strictly. He claimed that his lack of adherence to his own rules was the main reason for his losses after making his 1907 and 1929 fortunes.” Moreover, he committed suicide on November 28, 1940.

    If all the above facts are true about his life, then I don’t think many people would like to admire him as their hero or role-model. The purpose of this comment is not to offend someone but just to share the other side of the story. If knowingly or unknowingly anybody has got offended then I apologize for the same.

    (Here’s an interview of Warren Buffett with David Rubenstein where he shared some facts about his life and investment journey including the amazing 55 years investment record!)

    • Surya Kanth says:

      See I think Buffet is a very very Smart investor. He is not a small investor. But let’s say you are given 20000 crs to invest. How easy it is to find a good stock. Because all stocks below 15000 crs MCAP would be very tough to buy. An what about stocks which are at 1000 cr and 5000 cr MCAP and at high growth phase. Impossible right??? At that stage you are left with options like ITC, Infosys, HUL etc… But Long-term FD rates in US is 5% I think. SO he is doing 5 times better at 25% compounded. In that case I should be doing 45% return.

  11. To slightly move away from x% and y% returns, multibagger et al.
    Let us be clear why we invest in stocks ?
    My answer (and it is my personal view) is to be able to get slightly above (Bank FD type) returns which are tax free and compound year on year.
    Remember compounding is a great invention.
    If that be the case shortlist some good stocks, basis your well drafted checklists, assign a weightage for different points and you are ready to go.
    Too much discussion and probing may incrementally yield marginal value.
    Shaving goods will sell, people will need power, internet should grow, cars will sell, people will move towards readymade/ processed healthy food etc.
    Have a longer holding time period and patience.
    If none of these makes sense, just buy the Index when it dips or do a regular purchase every few days or once a month or whatever.

    • Surya Kanth says:

      It is upto you actually, what kind of returns are acceptable. But with all the volatility and pain in the market Return on Stress is what i would like to think. You don’t have to work hard for 10% FD return right??? But for 15% do you work so hard to pick 5 -10 stocks among 3000-4000 and argue against everybody and then fight yourself hard when the market comes down.
      A caution here: I am not against Vishal or SN. And I will not offer any tips also. I am a small investor and a learning investor. I am arguing against thoughts but not against people.
      Now let’s take a case where you have a relative who is a heart patient, and the risk is 4 lakhs. We do not know when it can strike again. How many people carry such risks in their portfolio and understand the rate of return based on that. In an acceptable case, You may end up with zero networth if the event strikes.
      Actually this is the case with me, My father is a heart patient, He underwent a surgery 3 yrs back. He is vulnerable after 2015-16 . My networth is almost 4 L. So if I compound it at 15% My networth is at big risk. If the event strikes, which should not, the worst situation will be I will be at same place where I am now.
      I feel that It is very important to carry big expenses as a risk to your portfolio, You definitely cannot carry Very unknown,exceptional risks, but atleast known big expenses need to be understood. For example you might have daughter where you have to offer a dowry 5-6 yrs after etc etc.

      The second argument is what are the long-term FD rates when Graham made 15-20%. It should not be 9% like now. If so America would be really crazy to treat him as Godfather.

  12. Hi,

    The chances of a good quality stock doing better year on year are always good if the management keeps performing in terms of growth/profitability. Deviating a bit from Gruh Finance, i would like to understand how to compare a company like GIC housing finance with Gruh Finance. From what ever i could lay my hands on, i felt that GIC Housing is also a good quality company on the following parameters:
    a. No equity dilution
    b. Focus on retail loans
    c. 0 Net NPAs
    d. Consistent profitability and dividend payout.
    e. Dividend Yield of 5-6%

    I am not looking forward for someone to endorse whether GIC is better or not, rather, I am more inclined to understand if we pick a company in the same segment like that of Gruh Finance then what are the parameters on which Gruh Finance performs better and the scale on which Gruh Finance will continue to do better. When ever it comes to financial stocks it is easier to compare financial ratios, NIMs etc but it is difficult to gauge upfront the change in the financial parameters due to economic/global/domestic/industry/business model related influences. The change in the financial parameters could be either upward or downward, but given the fact that Housing Finance is not a new business, i would assume that it shouldn’t be difficult to replicate a good business model as that of HDFC Ltd, Gruh Finance etc by other companies such as GIC.


    • Surya kanth says:

      Excellent Question….One of the most important models in investing is asking and testing a valuation model before judging it.
      Think like Market… What I would Value more is the Management pedigree. See A normal Person would always like GRUH but not repco or GIC Housing… Because of the default
      feeling that HDFC management is good The stock sells at higher PE.
      But I will tell you there are three ways to make money:
      1. Buy companies with growth prospects with excellent management like GRUH.
      Think about GIC, Market already has a way of giving Higher PE to GRUH because of the management. Now GIC has to prove that the management is as credible as HDFC to get such a very good PE. Otherwise You may have GIC selling at 25 PE in Bull Market but GRUH is going to maintain the PE unless the Management defaults two three times like Infosys. In a Bear Market you will see that GIC selling at normal rates again. You make good returns here.
      2. Here we already know what is valued by market and hope the company we buy reaches it.
      In case of GIC or Repco or DHFL the point is Management has to build credibility to get hoigher valuations. That is the risk. If DHFL does not bring in credibility The market may give at most 10 PE but not higher. Buying DHFL and GIC at 5 and 10 PE ratios may give us margin of safety in terms of price but The real risk is definitely Management. If the management defaults in the case of DHFL or GIC, people will evacuate faster than in GRUH. You make multibaggers here because of the unknown element and PE re-rating.
      3. Buy for a bounce.
      This is simple. Buy against the tide. You buy a Public bank today… They don’t go anywhere you may make 3-4 times once economy starts recovery. But they fall simply 30-40% for 2 yrs if there is bear market is again. THE MAIN RISK HERE IS TIME. WHEN IS THE RECOVERY GOING TO HAPPEN? We are in bear market for 2 yrs already, and Let’s say you bought last year, because of margin of safety in price, lost already 30% If the economy recovers next year or in 2016 the Investor has to see the paper loss or mediocre returns in the share for 2-3 yrs. And what happens if you bought a wrong stock. You keep averaging for 3 yrs and not make money. Waste of time and Waste of money. I will do this. But only 10-15% percentage of my portfolio. You can make good returns here, Provided you are sure about recovery and success of the stock. Actually this is the toughest. Atleast for me.

      All the companies have excellent ratios in Housing finance, But the difference is in perception of Managgement.

      • Surya kanth says:

        And I will tell you something, For a naive investor, It seems that we are always trying to get a grip on financial parameters, But in financial Companies, it is not possible. To tell you the truth, When I bought Indusind in 2010, I had only one curiosity, The bank is so big and paramters are many. I do not know which loans are good and which are bad. My point then was Private banks were doing better than public banks historically. The are taking away market share from PSU’s. I asked myself what is the difference between maintaining 2 NPA for Dena bank and 0.1 NPA in Indusind. The difference is I made money every year in Indusind but not in Dena bank even though The PE of Indusind then was high and Dena bank was Low. I took Indusind as an example. Please don’t buy the stock now. Even I am waiting to see how Policy decisions will shape PE’s of Private banks.
        Only in case of some companies, we can be so sure of financial Parameters. WHAT WE HAVE TO MAKE SURE TO CREATE A PERFECT PORTFOLIO IS BUY STOCKS WHERE EVEN 1-2 YRS OF FINANCIAL STAGNATION ALSO WOULD NOT REDUCE THE DEMAND FOR STOCKS. Like GRUH. last Year profit growth was 21% but price growth was 50%.

        • Pranav Singh says:

          Your clarity of thought at a young age is impressive. There are multiple ways to skin a cat. You follow the way that appeals to you. I feel that I have been undergoing a transition from investing in complete margin of safety stocks to growth stocks that might even look richly valued.
          Frankly, difference of opinion is what teaches us the most. So, Hope to see you around at SN.

  13. What do you guys say about IDFC?
    It also has a good management. It is available at reasonable valuations whichever way you look at it.
    The growth part is looking missing for now but that should pick up as soon as the economy picks up. That may be 3 years form now for sure.

  14. I think that you are mistaken when you said that GRIH finance generates free cash flow. the company need to invest the cash back to the company in terms of Capital Requirements. Whatever will be the growth in Loan Book, that much capital will be required and hence Free Cash flow generation is much lower than reported PAT. thats why I would like to compare financial companies on book value rather than earnings. At 6x one year forward book, it seems to be fairly priced and little room for margin of safety, in my view.

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