My Latest Stock Pick Is A “No Brainer” With A “Moat”: Mohnish Pabrai

Mohnish Pabrai inspires Dalal Street Glitterati in fitness challenge

Mohnish Pabrai lives in California. However, he wields enormous influence in Dalal Street, both amongst the intelligentsia as well as the novices.

The creditable aspect is that despite the millions under his belt, Mohnish has a humble and down-to-earth attitude.

He has also been doing yeoman service for the downtrodden through his Dakshana Foundation.

This makes him the ideal role model for us.

Mohnish is very particular about his physical fitness as one can gauge from his toned body and rippling muscles.

He threw an open fitness challenge to the who’s who of Dalal Street.

Hi @porinju challenge accepted. I now request the wonderful Mittal brothers, @ayushmitt and @faltoo to post their #HumFitTohIndiaFit videos. Enjoy! pic.twitter.com/PLLhfkRGpy

— Mohnish Pabrai (@MohnishPabrai) May 26, 2018

Nikunj Dalmia was amongst the first to respond.

I accept the fitness challenge sent to me by my friends #humfittohindiafit here is my video, I encourage my friends to share their fitness videos @1shankarsharma @Iamsamirarora @sandipsabharwal @Ajaya_buddy @tanvirgill2 pic.twitter.com/3i9SgusGog

— nikunj dalmia (@nikunjdalmia) May 30, 2018

Nikunj’s effort was commendable though his form was sloppy.

Shankar Sharma pulled him up and gave him a rap on the knuckles.

Nikunj, your elbows are moving too much, leading to shoulders coming into play. Lock elbows by your side when doing curls. This will isolate biceps, and will enhance workout ROI massively ?!

— Shankar Sharma (@1shankarsharma) May 30, 2018

Shankar is known to be a perfectionist. He does not spare anyone.

Nikunj took the rap sportingly and assured that he would take corrective steps.

Shankar, i was right in tagging you in this challenge because i know whether its markets or fitness, you will always add value. Will follow your advice 🙂

— nikunj dalmia (@nikunjdalmia) May 30, 2018

Tanvir Gill, as expected, was the epitome of perfection. She performed the challenge flawlessly.

Accept your challenge @nikunjdalmia …I challenge my friends @_nirajshah @avannedubash @connectgurmeet @MotilalOswalAMC @PunitaKSinha to put up their fitness videos #humfittohindiafit pic.twitter.com/KEPYA8WQxT

— TanvirGill (@tanvirgill2) May 31, 2018

Even Shankar was impressed. He gave her a clean chit.

“Good form, Tanvir” he said.

Good form, Tanvir. Elbows are nice and up. Just keep an eye on the grip. Keep Knuckles a little low & perpendicular, handle should rest on palm, and force should go linearly through arm , through palm, into the handle. Ensures perfect force transference?

— Shankar Sharma (@1shankarsharma) May 31, 2018

Avanne Dubash also rose to the occasion and put up an impressive show.

With the fitness challenge being all the rage, I’m pretty proud of myself (sorry for boasting) for completing 64 squats in a minute & holding a plank for 4 mins 20 seconds! ?????? #workout #gymlife #fitness pic.twitter.com/rZUps2hLBV

— avanne dubash (@avannedubash) June 5, 2018

Unfortunately, she forgot to post proof of her accomplishment.

Proof?

— Darshan Mehta (@darshanvmehta1) June 5, 2018

However, it is revealed that she is the winner of a prestigious award for the CCI Health Club Competition which shows that she is in fine fettle.

Congratulations @avannedubash !!

64 Squats in 60 seconds.
Plank for 4:20 minutes.
Running, cycling, weights…too good ??

No challenge-wallenge ? pic.twitter.com/REhhbDNURw

— Siddarth Bhamre (@SiddarthBhamre) June 12, 2018

Obviously, the hoi polloi has to take a cue from the glitterati and work towards getting in shape.

Housing finance stocks are a “no brainer”

At a talk delivered at the elite Columbia University, Mohnish described housing finance stocks as a “no brainer”.

His logic is simple and convincing:

“As India rises, it is a no-brainer that people will want good housing and it is a no-brainer that they will have to finance it because there is no way that they can just buy it with their income levels …..

…. The housing finance sector will grow at 3 or 4 times GDP growth. So, if India is growing at 7%, the housing companies may be growing at 20 to 30%”.

(Click on image to view video)

Aggressive buy of Repco Home Finance

Of all the HFC stocks available, Mohnish has reposed his trust in Repco Home Finance.

His assorted PMS funds named Pabrai Investment Fund II LP, Pabrai Investment Fund 3 Ltd, The Pabrai Investment Fund IV LP, Dhando India Zero Fund LP, Dhando India Zero Offshore Ltd, Dhando Holdings LP and Dhando Holdings Qualified Purchaser LP have collectively bought 32,31,728 shares of Repco Home Finance comprising 5.16% of the equity capital.

The investment is worth about Rs. 184 crore.

Repco has no competition and maintains lending discipline

All of Mohnish’s fans and followers were agog with curiosity as to why Mohnish chose Repco Home Finance out of all the HFC stocks that are available.

Mohnish has provided a clear-cut answer in his latest interview to Tanvir Gill and Nikunj Dalmia:

(i) Repco has no competition (other than local moneylenders) in the demographic (rural and sub Rs. 10 lakh loans) that it is servicing;

(ii) It maintains tight lending discipline. This is shown by the fact that the write-offs (net of write-backs) are a petty amount;

(iii) Assuming that the lending discipline is maintained in the future as well, the odds favour the investment.

Repco has a moat in the rural geographies and the sub-10 lakh ticket loans, Mohnish said.

#ChaiWithPabrai | Repco Home has no competition in the demographic they're serving; Expect Repco's lending discipline to continue in the future, says @MohnishPabrai in an #Exclusive chat with @nikunjdalmia @tanvirgill2 pic.twitter.com/4Jr8w0HhpL

— ET NOW (@ETNOWlive) June 1, 2018

[*C] Consolidated     [*S] Standalone

(Source: Business Standard)

Repco Home Finance is on the path of recovery

Mohnish is justified in his confidence upon Repco because the management has assured that the Company is getting its act in order.

R Varadarajan, the CEO, explained that under the law any loan which is outstanding for more than 90 days has to be classified as a ‘NPA’ though the borrowers, being mostly salaried employees, usually repay the loan with interest after a delay.

He also explained that law on repossession of assets under the Sarfesi Act is putting the fear of God in borrowers and they are wary of defaulting.

He also revealed that the Company is going slow on LAP (loan against property) and this has helped to put a leash on NPAs.

Varadarajan also revealed that the growth opportunities are “huge” and that the Company intends to grow without sacrificing its margin and business model.

Hike in interest rates is not a deterrent for home finance borrowers

Yet another aspect worrying investors in Banks and NBFCs is the impact that the recent hike in the interest rates by the RBI will have on the fortunes of the sector.

Varadarajan explained that borrowers are generally indifferent to minor changes in the interest rates.

While a small dip in the rates does not enthuse borrowers to borrow aggressively, a small hike in the rates does not deter them too much.

“The market can absorb up to 100 bps hike because earlier also, we have gone through this rate cycle because our company has been there for the last 18 years. We have seen that these rate cycles have not impacted demand in a major way. In fact, even in case of a substantial reduction also, we have never seen a great demand because prices have come down,” he said.

On the other hand, he pointed out that the hike by the RBI in the priority sector lending limits means that eligibility for home loans under affordable housing is now at about Rs 35 lakh in metros and Rs 25 lakh in other centres.

He explained that this is a really positive step because the lenders, particularly the banks, when they lend to the housing finance companies up to this limit, they can treat it as a priority sector lending and therefore the HFCs can get a better rate for their loans from the banks.

“It will have a positive impact on the cost of funds,” he said.

Boost For Affordable Housing: Govt Eases Carpet Area Curbs

Repco Home Fin To @BTVI: Co's Average Ticket Loan Size Is Around Rs 15 Lk

*New Govt Move To Help Co In Tier-II & Tier-III Cities

*Existing Inventory To Get A Major Push Due To The New Change pic.twitter.com/83xjA8YPZC

— BTVI Live (@BTVI) June 13, 2018

#RBIPolicy | Repo rate hike impacts incremental borrowing & not existing borrowers; MCLR rates at which borrowings have been already done will change with a lag, says R Varadarajan of Repco Home Finance@nikunjdalmia @AyeshaFaridi1 @tanvirgill2 pic.twitter.com/lMoPw5otGI

— ET NOW (@ETNOWlive) June 7, 2018

Repco will see “brighter days ahead”: Experts

HDFC Sec has recommended a buy of Repco Home Finance with the assurance that it will see “brighter days ahead ”.

The rationale is as follows:

“REPCO’s 4Q numbers beat estimates given the claw back in asset quality (GNPAs dipped ~20% QoQ). Though overall growth (+10% YoY) was sluggish, it was largely owing to (deliberately) tepid growth in LAP (up merely 2%).

We like REPCO for its steady (if slow) healing, 2%+ RoAAs and the sizable addressable opportunity. Maintain BUY with a TP of Rs 683 (2.5x Mar-20 ABV of Rs 273).”

Motilal Oswal has expressed a similar optimistic opinion:

“REPCO recorded a loan book CAGR of 26% and earnings CAGR of 24% over the past five years. Presence in the underserved markets, reasonable pricing power on the asset side and expanding reach should support its earnings over the longer term. However, in the recent past, the company has been plagued with several issues, predominantly on the growth front. We believe that these issues should get resolved over the next few quarters. We cut our FY19E/20E EPS by 3%/4% to factor in lower growth. Buy with a target price of INR710 (2.5x FY20E BVPS).”

IIFL also recommended an ‘Add’ for Repco HFC.

IIFL on Financials: Not the best of times; stay underweight
Downgrade PNBHF to ADD (from BUY) as we build in risks due to potential reduction in PNB’s ownership & consequent impact on its credit rating
Re-iterate SELL on LICHF, ADD on REPCO & BUY on HDFC@kothariabhishek

— Nimesh Shah (@nimeshscnbc) June 7, 2018

Conclusion

It is obvious that Mohnish has put a lot of thought into his decision to buy Repco Home Finance. Prima facie, it does appear that the Company has the wherewithal to turn around and delight Mohnish and the other investors will mega multibagger gains!