Case Study Of A Multibagger Stock – REPCO Home Finance

What is a good way to find multi-baggers?

Study past successes and failures and implement the learnings in the future

Let’s do that.

Affordable housing has been a thrust area for the Government for at least a decade now. Many housing finance companies have shown phenomenal growth in the recent past. 

Let’s understand this with the help of the graph. We have taken the post-COVID period of a few housing finance companies’ stocks to analyse their growth.

Graph: Loan book growth of Housing Finance companies

The 24-month growth of some of these stocks is impressive, especially Home First Finance.
Now let’s find out how the stocks have performed.

Graph: Stock price growth of Housing Finance companies

Looks A Bit Confusing, Isn’t It?

The two Housing Finance Companies with the least loan book / sales growth – PNB Housing Finance and REPCO Home Finance have given the best returns in the last 24 months since Jun24 although both have faced numerous problems. Both are

• Mediocre companies
• Had significant trouble with non-performing assets (NPAs) in the post-covid period
• Both had management upheavals, such as changes in top management.

Conventional wisdom teaches us to buy into good businesses which are market leaders in their sector/line of business. But here the not-so-great businesses with lower growth have delivered far higher returns than the leaders in their sector.

Let’s Look At Why This Happened

We can find the answer in starting valuations back in June 2022.

Graph: Valuations (Price to Book P/B) of housing finance companies

June 2022 was exactly one year after the 2nd Covid wave. The gross NPAs of all the lenders had increased.

The time from June 2022- June 2024 was the time for course correction. Lenders focussed on asset quality stabilization and gross NPA reduction.

The below graph analyses the improvement in asset quality for various housing finance companies. We see that the maximum improvement in asset quality was for PNB Housing Finance and REPCO Home Finance – stocks which consequently gave the maximum returns during this time period 

Graph: Gross NPA of housing finance companies

  Graph: Share Price Chart Of REPCO Home Finance

  Graph: Share Price Chart Of PNB Housing Finance

Let us pick one –  REPCO Home Finance and see what lessons we can learn from it.

REPCO Home Finance	Mar-22	Mar-24
Gross NPA (%)	7.0%	4.1%
Net NPA(%)	4.9%	1.5%
P/B	0.40	1.30

The table above mentions the price-to-book value (P/B) and NPA Position of REPCO Home Finance. Typically a low P/B Value signifies the stock being underpriced or it also indicates something fundamentally wrong with the business.

A P/B value of 1.22 in Jun24 is cheap/low and a P/B value of 0.34 in Jun22 is damn low.

If a lending business is trading at a valuation of P/B = 0.34, the market probably thinks that the company is going bankrupt.

Was there any substance to this in March 2022?

How can we know if REPCO Home Finance is on the brink of bankruptcy?

Housing Finance Companies disburse home loans which are secured assets. It takes time to recover bad loans, however, the recovery is reasonably good over a 24 to 36 months period.

To evaluate how well REPCO Home Finance has done on the recovery of bad loans, we can analyse the “write-off” of bad debts over the last 15-year period

REPCO Home Finance	Write-Off (Rs Cr)	Total Loan Book (Rs Cr)
FY08	0.2	655
FY09	0.58	991
FY10	1.06	1408
FY11	0.95	2076
FY12	0.04	2804
FY13	0.23	3545
FY14	0.29	4662
FY15	0.13	6,013
FY16	0.34	7,691
FY17	0.5	8,940
FY18	16	9,857
FY19	0.5	11,037
FY20	0.7	11,826
FY21	3.1	12,121
FY22	3.2	11,759

After analyzing the last 15 yr history, we realize that even if gross NPAs rise substantially in the short term, actual write-offs ie bad debts are not very high.

It takes time to recover bad loans, but bad debt recovery is high/good.

This means that in June 2022, when gross NPAs for REPCO Home Finance were as high as 7%, we could have estimated that actual loan losses over the next 24 months would not have been very high.

This signifies that the probability of REPCO Home Finance going bankrupt was very low.

A low P/B of 0.34 in June 2022 which was suggesting bankruptcy risk was actually the stock of REPCO Home Finance being mispriced.

Some Key Learnings

1. Focus On Low starting valuations.
   This provides both margin of safety and probability for multiple re-rating (3.5X on book value in this case)

2. Contrary to conventional wisdom, It is not always the best company/market leader which gives the best returns over the medium term. Many times, it is the mediocre, showing clear signs of improving business and coming out of temporary/solvable problems.

3. Analyze long-term trends for the Company/Industry
   As an investor develop that knack to spot temporary & solvable problems. If the market is giving very low valuations to the business it means the market does not believe that the problem is either temporary or solvable and that’s why it underprices the stock. If you can spot all this you can make lots of money.

Why was it not easy to invest in REPCO Home Finance in June 2022?
What was the catch?

Multiple reasons

• All lending businesses had gone through Covid wave 1 in 2020. Damage to business and operations was severe. No one knew how many more Covid waves would come and how that would have an impact on the business. 
• By June 2022, it was already one year past 2nd wave, lending companies had just started revealing the extent of damage to their loan book portfolios – gross NPA
  All lending businesses were reporting an increase in gross NPAs – no one knew how much higher it would go and hence investors were skeptical.
• Stock prices had fallen and were continuously on the decline- the problem with investing in such an opportunity is that one should have the capacity to bear the losses if stock prices fall more. In most cases, one has to invest more when stock prices fall more – always a dicey and scary thing to do

To summarize, an investor who had done his homework- analysed the long 15-20-year history of housing finance companies and had the courage to buy REPCO Home Finance, keeping in mind a suitable stop loss, would have made phenomenal returns. 

If you want to invest in stock markets but do not have enough knowledge or time for the same, contact us.

PS – I was/am not invested in REPCO Home Finance during this time period. I did not make money in this opportunity. This is a post-facto analysis so that I improve my investing skills for the future.

Disclaimer: Amey Ashok Kulkarni is a SEBI registered investment adviser.
Nothing mentioned here should be construed as investment advice.
This blog post is purely for educational / learning purposes.