RHF: Demerger done, on to execution

Ability to scale up while keeping costs down and asset quality will be key

In a bearish market when the benchmark indices were down over a per cent, Reliance Home Finance, the demerged subsidiary of Reliance Capital, hit the upper circuit and closed with gains of over five per cent on its debut at ~109.2 on the BSE. The demerger and separate listing is expected to bring in better focus and more efficient capital allocation, believe analysts. While valuations are reasonable at current levels and the company has robust growth plans, execution will be crucial.

The company has set an ambitious target, which entails growing its book by If it reaches the target by 2020, it would mean a growth of 56 per cent annually ~50,000 crore by FY20 from the current ~13,000 crore. One of the key segments it is betting on is affordable housing, riding on the government’s policy of housing for all by 2022. Currently, this segment accounts for 19 per cent of the overall book. The other segments of its business are retail home loans (35 per cent of book), loans against property and construction finance, the last two comprising 21-23 per cent of its loans.

While the loan growth for the sector in the segment has been low, what could help is the initiative announced on Friday whereby the government extended the subsidy benefit of ~2.6 lakh on home loans under the Pradhan Mantri Awas Yojana for middle-income groups by 15 more months. The scheme was to end in December this year. Analysts say what is even more pertinent is the government’s plan to acquire surplus land to develop affordable housing.

Given that the affordable housing space is new, most analysts have a cautious approach to the segment. “While the growth potential is high, the segment has not seen a complete credit cycle (including repayment behaviour) which makes it difficult to judge the ability of the company to grow without adversely impacting its asset quality ratios, says an analyst.

Though most analysts are confident that the company will be able to achieve its FY18 target of ~20,000 crore on its book (from the June quarter levels of ~13,000 crore), they are cautious given the slowing realty market pegged back by earlier demonetisation, implementation of GST and more important, Real Estate Regulation Act (RERA). “Given RERA, there have not been many disbursements and growth in the first half of the fiscal year is expected to be impacted,” says an analyst.

The other segments the company is looking at are loans against property, especially from non-metros, and construction finance. While 80 per cent of its customers are self-employed, the company is the company expects the salaried class to form 40 per cent of its incremental business. Analysts at Ambit Capital highlight the growth could come under pressure for housing finance companies, given increasing competition from banks, especially in the salaried segment, as well as moderating real estate prices.

While the company’s cost to income ratio at over 40 per cent is double that of peers given the expansion phase it is in, the company has a target of bringing this down to below 25 per cent over the next two years as the business scales up and it implements a calibrated branch expansion to keep costs under control. While gross non-performing loans at 0.8 per cent are broadly at stable levels, analysts say how the asset quality number moves given that it is in a high-growth phase is a key metric to watch.