Repco Home Finance - Qualifies as a value - BUY on back of improved outlook - ICICI Securities

Repco Home Finance's (Repco) Q4FY20 result has the following positives: 1) declining incremental cost of borrowings leading to NIM of 4.7%, up 40bps YoY, and this could result in positive NIM surprise in FY21 too. 2) Headline GS3 deteriorated by 10bps QoQ to 4.3% in contrast to our expectations of a much sharper deterioration; this incorporated the benefit of moratorium and DPD freeze, but remains positive nonetheless. 3) Company made additional provisions of Rs393mn (~33bps of outstanding loans) and we expect it to continue making Covid-related provisions in H1FY21 too. 4) [GS2 + GS3] assets declined 6.6% (from ~15% in FY19). 5) Collection efficiency in June at 68% suggests improving customer activations and declining moratoriums. 6) Dividend payout at Rs2.5/share even in such a tough environment would have pleased investors.

Loanbook growth in FY21 however will remain muted because of tepid demand and higher foreclosures given unusually high aggression from certain PSU banks. With slightly better visibility, we now model lower credit costs of 130bps/90bps for FY21E/FY22E. Upgrade to BUY with a target price of Rs170.

- Anticipate a positive surprise on NIM: Repco borrowed Rs2bn between March and July largely from NHB and commercial banks (term loans) including from Repco Bank. Its incremental cost of borrowings (down to 8.4% in March) has further reduced and we expect this to lead to a 10bps improvement in NIM for FY21E.

- Loanbook growth will remain muted at ~4% in FY21E: Faced with headwinds from both demand slowdown (due to national and localised lockdowns) and aggression from PSU banks in its core geographies, Repco's disbursements will take some time to pick up while aggression from banks will mean that foreclosures will remain elevated all through FY21.

- Annualised credit costs remain benign, but need to show improvement in headline GNPA for a structural rerating in valuations: Repco reported sequentially stable asset quality with the headline GNPA at 4.3% (up 10bps QoQ). With ~52% of its customers non-salaried, REPCO remains susceptible to deterioration in asset quality, in our view (the non-salaried customer basket contributes ~82% of GNPA). Credit cost in the current fiscal will be a function of post-moratorium collection efficiency and the extent of recoveries that can be achieved in its GS3 loanbook. We estimate credit cost at 130bps in FY21E.

- Value-BUY with better visibility on collections: Repco has strong capital adequacy of ~26% and has sufficient risk capital to absorb any contingency from a sudden deterioration in asset quality. Valuations at 0.37x FY22E P/BV are compelling despite the overarching expectation of investors that the company demonstrates recoveries in the GS3 book. We upgrade the stock to BUY (from Add), but continue to identify past mistakes in LAP segment, potential deterioration in asset quality post moratorium, and concentration/competition-driven growth recovery delays as key downside risks.

Shares of REPCO HOME FINANCE LTD. was last trading in BSE at Rs.138.75 as compared to the previous close of Rs. 132.15. The total number of shares traded during the day was 4016 in over 33 trades.

The stock hit an intraday high of Rs. 138.75 and intraday low of 138.75. The net turnover during the day was Rs. 557220.

Source : Equity Bulls

Keywords