The Business Model & “Moat” Of Repco Home Finance

We need to keep an eye on Repco Home Finance because it is showing all signs of being a winning stock. Apart from Basant Maheshwari, who has put it in his Model Portfolio, Anand Narayan, Sr. MD of Creador, came on record to say that “Repco Home is a high quality business that has a great track record and it will continue to perform well”.

Now, R Varadarajan, MD of Repco Home Finance has, in an interview to Hindu BL, given insights into the workings of the company. From the business model, it appears that there is a strong “moat” available.

Firstly, Repco targets non-salaried, small business operators and the self-employed. These potential borrowers have no documentation to prove their income. The average ticket size is about Rs. 11 lakhs. So, banks are not interested in them and will not pose a competitive threat.

Secondly, to evaluate the credit-worthiness of the potential borrowers, Repco has developed an ingenious method. Its representatives visit the potential borrower’s workplace for a few days in a month to observe the cash flow. They also visit the household to gauge the family members’ lifestyle and assess the household’s capacity to repay. “This gives us a clearer picture than any audited P&L accounts and balance sheets would do” Varadarajan said.

The important point is that this “comfort level” as to the ability of the borrower to pay comes from a one-to-one relationship between Repco’s employees/ agents and the borrowers. This creates a “moat” for the company. It will be difficult, if not impossible, for a competitor to set up a similar network requiring a one-to-one relationship with thousands of borrowers, in the rural areas.

In fact, Shriram Transport Finance, which deals in the financing of new and used trucks, has a similar business model under which its agents have, over the past several years, developed an impenetrable “personal bond” with the borrowers (Ajay Piramal made a reference to this when he bought a stake in Shriram Transport & Shriram Capital).

Thirdly, Varadarajan pointed out that there is a “huge potential” in the rural market because the penetration of organised housing finance is at a negligible 9 per cent.

The other important point that Varadarajan made is that there would be no equity dilution for the next four years. He categorically said that company’s capital adequacy ratio is at 25 per cent, “which will go a long way” and that “we need not raise any further capital for at least the next four years.”

One more aspect worth noting is that while Repco has 100 branches already (spread over 8 States), it proposes to add at least 10 branches every year. This year, it will add 15 branches, of which most will be in tier II-III cities.

So, there should be enough in terms of growth in top-line and bottom-line to keep investors’ interest in the stock. The increase by the RBI of the FII investment limit to 49% also augers well for the stock.