MOSL: GRUH FINANCE (Neutral)-Impressive all-round performance

​GRUH FINANCE: Impressive all-round performance

(GRHF IN, Mkt Cap USD2.8b, CMP INR510, TP INR500, 2% Downside, Neutral)

• Gruh Finance (GRHF) reported PAT of INR778m (4% above our estimate) for 2QFY18, largely driven by lower-than-expected operating expenses. Opex growth slowed down to 11% YoY, resulting in 300bp YoY reduction in C/I ratio to 17.6%. In FY17, the company had incurred significant lagged expenses of branches opened in FY16, which will not recur this year.
  
• Loan growth was in line with trend at 18% YoY, driven by retail home loans. However, disbursement growth was robust at 28% YoY (in line with 1QFY18 performance). While the management expects ~30% disbursement growth in FY18 due to improving traction in the affordable housing arena, we believe GRHF will achieve ~40% disbursement growth this fiscal.
  
• Interestingly, GRHF was able to sustain yields at 11.8% despite a very competitive environment. Driven by lower cost of funds, margins improved 13bp QoQ and 45bp YoY. We believe there is scope for further 20-30bp reduction in cost of funds over the next few quarters. However, if yield pressure sustains, there is a chance of margins declining in FY19.
  
• Asset quality remains pristine, with GNPL/NNPL ratio of 67bp/7bp.
  
• While capital adequacy is sufficient at the moment, GRHF might look to raise capital a year or two later, if loan demand picks up.