Repco Home Finance - Intrinsic franchise value, low LGD to outweigh interim risks - ICICI Securities

We upgraded Repco Home Finance (Repco) to a value-BUY in July when the stock was available <0.4x P/BV (stock has since delivered >35% return). Stable Q1FY21 operating profit further vindicates our positive stance though we would not get too excited with the earnings beat. It was primarily due to lower credit cost - merely 12bps further contingency build-up (when we were estimating 120bps credit cost for FY21E - not revising it either). Not much movement in collection efficiency (65-70%) from June to August keeps us guarded on credit cost. However, comfort comes from the data that >93% customers are making partial or full payment (only 8.7% of loans not registering any collection since March). Higher credit cost in the coming quarters will be offset by funding cost benefit, which is yet to be reflected. Given secured lending (60% LTV would cap LGD) and it being a potential acquisition candidate, Repco can command 0.7x P/BV FY22E multiple leading to a revised target price of Rs248 (earlier: Rs170).

- Coverage increased to 1.8% of AUMs; much more needed: Repco has increased LGD and PD, thereby taking coverage to 41% (from 35.8% QoQ) at Rs1.6bn. Besides, it has created Rs150mn contingency buffer (>Rs400mn in Q4FY20). Cumulative provisions now stand at 1.8% of AUM. Lower headline GNPA at 4.0% (down 30bps QoQ) was more due to technically zero slippages. However, we remain wary about ~52% of its customers being non-salaried and ~35% of portfolio being under Morat 2.0. While management is confident of reaching 90% collection efficiency by September-end, there might be some technical delays/deferment requiring higher provisioning. We are building-in credit cost of 1.2%/0.9% for FY21E/FY22E (though LGD will be low on secured collateral and 60% LTV).

- Funding cost benefit not reflected; NIMs to normalise: NIM fell 30bps QoQ during Q1FY21 as 50bps QoQ contraction in yields was not offset by lower cost of funds. Though NHB borrowings (at 5.5%) rose 36% QoQ (10.5% of total borrowings), it was towards the fag end of June; resetting on bank's borrowing too was not fully reflected. The benefits of incremental borrowing cost being lower (by >150bps) will flow in coming quarters. This will stabilise NIMs back to 4.3% (from the reported 4%).

- Loanbook growth to be modest: Disbursements are currently at 50-60% of the earlier run rate and would normalise post Q3FY21. This will be partially offset by a higher repayment run rate post lifting of Morat 2.0. Also, competitive intensity is leading to elevated balance transfer (outward) at 10-12% (vs 9% in FY20). This will cap loan growth in the interim at mid-single digit.

- Intrinsic value might drive further rerating: Growth will be modest and the consolidation phase would continue for some time. However, capital adequacy at 26%, cumulative provisions at 1.8% of AUM and collateralised lending would sufficiently absorb asset quality volatility. Intrinsic value of the franchise and the company being a potential acquisition candidate can drive further rerating. Maintain BUY.

Shares of REPCO HOME FINANCE LTD. was last trading in BSE at Rs.181.9 as compared to the previous close of Rs. 173.25. The total number of shares traded during the day was 78680 in over 230 trades.

The stock hit an intraday high of Rs. 181.9 and intraday low of 181.9. The net turnover during the day was Rs. 14311892.

Source : Equity Bulls

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