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Brokerage Recommendations

Monday, March 23, 2015

Antique Stock Broking calls a ‘Buy’ on Gruh Finance
CMP: Rs. 260    Target Rs. 300

One of the pioneers in rural housing finance, Gruh Finance (GRUH) is among the few lenders to have maintained its "small ticket" character despite the relentless rise in housing prices across the country. Small ticket housing finance is characterised by rigorous appraisal and deep geographic reach, both of which have been mastered by GRUH through its unique ecosystem of referral associates and loan officers. More importantly, it has been able to replicate its success in core markets of Maharashtra & Gujarat to other states like Karnataka, Madhya Pradesh, Rajasthan and Tamil Nadu. Despite the 27% loan book CAGR over the past 10 years, GRUH has a minuscule market share of <1% in the Indian mortgage market. Further, the housing boom of 2002-2012 was largely urban and benefited banks and HFCs involved in large ticket housing finance. We envisage the housing boom of 2015-2022 to happen in affordable housing segment and players like GRUH are well positioned to benefit from it. We expect loan book CAGR of 22-25% over next seven years and RoEs in excess of 25%. Our residual income model suggests a fair value of INR300 per share or 30x FY17e earnings. Upgrade to BUY.

Slow but steady geographic expansion secures future growth: GRUH entered MP & Rajasthan in FY06 and Tamil Nadu & Chhattisgarh in FY08. It spent considerable time in understanding the local markets, appointing referral associates and recruiting & training local staff and is now ready to accelerate. Loan book in these new markets registered 40% growth in FY14, well in excess of 25% experienced in Gujarat & Maharashtra. Penetration driven growth will continue for many years to come as GRUH is present in only 403 of the 972 talukas in these states.

Productivity gains accrue out of a motivated employee force: Longevity of employee is crucial to business involving such deep understanding of housing micro-markets and customer behaviour. GRUH has ensured that by having a firm wide ESOP program across all rank of employees. Approximately 50% of its employees have been with the company for more than 3 years. Its referral associate model has helped it source small ticket loans at low cost. Its business per branch and business per employee has witnessed CAGR of 18% each over past five years.

Kotak Securities calls a ‘Buy’ on Kajaria Ceramics
CMP: Rs. 777    Target Rs. 860

Demand growth to remain strong: Consumption of tiles has grown at a CAGR of 13% over last 4-5 years and has been led by increasing consumerism and urbanization. Despite slowdown being witnessed in the real estate sector, we expect the demand scenario to remain strong going forward in medium to long term coming mainly from tier 2 and tier 3 cities led by rising income levels, increasing urbanization, change in consumer preferences as well as on account of replacement demand. This is likely to  benefit Kajaria Ceramics as company is ideally positioned to capture incremental demand with its strong distribution network.

Ongoing capex to lead to strong growth in volumes: Kajaria Ceramics has expanded its capacity by 7.5 Mn sq m during H1FY15 and another 5 Mn sq m expansion at Taurus JV is likely to commission by March, 2015. Expected GST implementation to benefit organized sector players: GST implementation is likely to be a game changer for the sector as it is likely to result in higher taxation for the unorganized sector. Due to excise duty avoidance and lower taxes being paid by the unorganized sector, they were able to price their products at cheaper rates as compared to the organized players. Expected implementation of GST by April, 2016 is likely to reduce the cost differential between the unorganized and organized players, thereby providing a level playing field. This is then likely to result in shift in customer's preferences towards organized sector due to lower cost differential, better quality and design. We expect Kajaria Ceramics to benefit significantly post the implementation of GST.

Valuation and recommendation: Stock is currently trading at attractive valuations of 24.5x and 20.6x P/E on FY16 and FY17 estimates. We tweak our estimates and also introduce FY17 estimates. We value the company at 23.5x P/E and arrive at a revised price target of Rs 860 on FY17 estimates (Rs 712 on FY16 estimates earlier). We continue to maintain BUY recommendation on the stock. Key risk to our recommendation would come from sharp hike in gas prices or rupee depreciation or demand slowdown.

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