Repco Home Finance Limited - Buy for Keeps - Antique

Repco Home Finance (RHF) is a long term play on the major Indian trends of urbanization and the shift towards nuclear family structure. It has built a niche through lending to salaried as well as self employed borrowers in tier-2, tier-3 towns and peripheries of tier-1 cities. Along with the high yields typical to RHF's target segment, it has developed a low cost operating model and a robust asset quality control mechanism that translated into loan book CAGR of 37% and earnings CAGR of 34% over FY09-13.

Geographic expansion outside South India, deeper penetration in existing geographies and potential opportunities in affordable housing segment will aid loan book CAGR of 30% over FY13-16E. Liability side benefits will aid stable spreads at 3% while stable asset quality will ensure earnings CAGR of 29%. Owing to the strong capital adequacy post the recent public issue, RoE will return to its +20% trajectory post FY15E, which we believe is a sustainable level for RHF. Initiate with a BUY and value it at INR288/share, which discounts FY15E book value by 2.1x.

Growth opportunities ample, liability benefits will aid stable spreads

Deeper penetration in existing geographies and expansion in regions outside South India will ensure long term growth opportunities. At the same time, continued focus on non-salaried customers in underserved markets will enable market share gains. At INR35bn as on March 2013, Repco's loan book remains small and we build in a 30% loan book CAGR over FY13-16E. Small ticket size of loans will ensure continued NHB refinance at lower costs while possibility of improved credit rating will enable Repco Home Finance to tap into alternative sources such as fixed deposits and NCDs. We expect spreads to remain stable at ~3% over FY13-16E.

Nimble operating model to contain operating costs

Employee costs are low as a typical branch consists of three or four employees who possess local knowledge, while administrative costs are low on account of the centralized credit appraisal model. Rental costs are in tier-2 and tier-3 towns are lower. As such, we expect cost-to-income to remain stable at 17% over FY13-16E despite annual addition of 12 branches.

Branch based origination, stringent processes ensures robust asset quality

Sourcing is largely handled by branch employees while appraisal involves mandatory visits at the property to be financed, visit at borrower's place of work, legal opinion and final approval from the head office. Staff compensation structure attaches equal importance to monitoring and collections as well. Credit losses over past thirteen years have been Rs390mn or 0.08% of total disbursements.

Earnings trajectory strong, Recommend BUY

Earnings CAGR of 29.9% over FY13-16E will be driven by strong loan growth, stable spreads and cost ratios. We expect Repco to report healthy return ratios with average ROA of 2.6%. We value Repco at 2.1X FY15 ABV (implied P/E of 13x), implying March'14 target price of INR288/share.

Source : Equity Bulls

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