Repco Home Finance Limited - Q2 FY21 Result Update - YES Securities

Robust core profitability; collection and growth commentary upbeat Repco delivered a large beat on earnings driven by material expansion in lending spread/NIM and lower provisioning. While the weighted cost of funds declined on downward repricing of borrowings (82% bank loans) and lower incremental funding cost (NHB re-financing was a large portion), the portfolio yield was stable due to portfolio churn (material quantum of BT Out) and risk-based pricing changes. Q2 FY21 disbursements stood at 65% of Q2 FY20 level and the loan portfolio was nearly flat on sequential basis. Current collection efficiency for September was at 93% and the non-paying non-NPL customer pool has declined substantially (~2% of loan portfolio) after the end of moratorium period. Repco thus made only a small addition to its Covid provisioning buffer in Q2 FY21 (cumulative at Rs510mn, ~42 bps of loan book).

The company is targeting 8-10% loan growth for the year and with expectations of clocking higher than pre-Covid level of disbursements in Q3 and Q4. Considering limited space for cost of borrowings to fall further, loan book re-pricing downwards (6-month reset) and company wanting to price competitively for growth and retaining BT Out, the Spread/NIM is expected to decline to sustainable levels of 3%+/4.2-4.4%. Management estimates stable credit cost in H2 FY21 with expectation of further normalization of collection efficiency (collections resuming from the bulk of overdue pool) and minimal restructuring (worst case 1.5-2% of loan portfolio). We see Repco delivering steady-state 2.2-2.3% RoA, post factoring a conservative credit cost scenario and normalization of NIM. See significant value in the stock despite the recent rally from the lows. Repco trades at 0.8x FY22 P/ABV; we reiterate BUY and raise 12m PT to Rs350.

Strong set of numbers

- PAT Rs808mn v/s expectation of 650mn, deviation was largely on two counts, firstly, PPOP 1,150mn v/s estimated 1070mn and secondly, lower provisions of 72mn v/s estimated 200mn.

- PPOP beat driven by strong 9% qoq growth in NII - drivers were risk-based pricing changes + higher penal interest income + softening of funding cost.

- Pricing changes have been made in both directions - Repco now has starting HL rate of 7.9% (usual 100 bps above market) for CIBIL of 750+ - pricing corrected upwards for certain perceived stressed segments.

- Funding availability being comfortable and its declining cost will protect NIM from coming-off at least in the current fiscal - company substituting higher-costing liabilities with lower-costing ones.

- Q2 disbursements at 65% of pre-Covid run-rate - Q3 expected to be better - BT in generally has been a negligible portion.

- BT out run-rate near 60-700mn per month - SBI has traditionally been the largest acquirer - but generally for loans >50 lacs - BT Out for loans <25 lacs minimal as DSAs/Banks target larger tickets.

- Collection Efficiency of 93% in Sept. is pure collections against month's billing - does not include arrears, prepayments or foreclosures - 93% collection represents more than 93% customers paying (87-88% is full EMI collection).

- Non-paying customers have come down from 10,650mn on Aug 31 to 7,600mn on Sept 30 and below 7,000mn at Oct end (current loan book 120bn) - however, this includes 4,800mn of NPLs also - so only residual 2200-2500mn (2% of loan book) is potential restructuring pool.

- Stage-2 is around 2.5% of loan book - including 20-30mn SC related potential slippages - Stage-3 at 4% with ECL of 41% - ECL on Stage 1 & 2 is 40 bps.

- Collection efficiency has marginally improved in Oct and expected to reach 95% by Dec (pre- Covid was 96-97%) - Confidence on collections improving coming from data on borrower income trends.

- Repco expect provisioning run-rate to be around 100mn in coming two quarters and quarterly PAT to be maintained at 750-800mn with disbursements improving.

- Provisional Tier-1 ratio at 27%.

Management Commentary

- Collection Efficiency of 93% in September is pure collections against month's billing - does not include arrears, prepayments or foreclosures - 93% collection represents more than 93% customers paying (87-88% is full EMI collection).

- Non-paying customers have come down from Rs10.65bn on Aug 31 to Rs7.6bn on Sept 30 and below Rs7bn at October end - above includes Rs4.8bn of NPLs also, so only residual Rs2.2-2.5bn (~2% of loan book) is the potential restructuring pool.

- No restructuring request received so far by the co. and the management don't foresee a material quantum either.

- December NPLs expected to be near the September level of 4% - management hopeful about collections/repayment resumption for the bulk of non-NPL non-paying pool and resolving/recovering some of the existing NPLs.

- Collection efficiency has marginally improved in October and is expected to reach 95-96% by December (pre-Covid was 96-97%) - confidence on collections trajectory stemming from the feedback from branches and regional offices.

- Repco targeting loan growth of 8-10% for FY21 - disbursements to reach pre-Covid level in a few months - estimated to be Rs7-8bn in Q3 and around Rs9bn in Q4.

- Liquidity position comfortable to support growth acceleration - on-BS liquidity at Rs4.3bn and off-BS at >Rs20bn.

- Competitive intensity from banks has increased reflected in higher quantum of BT Out in the recent months.

- Repco has recently reduced its MLR (minimum lending rate) to remain competitive and its loans have a six-month rate reset mechanism - management has no plans to change this repricing structure.

- Incremental yield in Q2 FY21 for Home Loans was 10.39% (10.46% in Q1) and for LAP was 13.22% (13.15%).

- NIM at 4.6% and Spread at 3.4% in Q2 - Spread to be maintained above 3% and NIM around 4.25% in the future.

Shares of REPCO HOME FINANCE LTD. was last trading in BSE at Rs.238.05 as compared to the previous close of Rs. 248.5. The total number of shares traded during the day was 47525 in over 2006 trades.

The stock hit an intraday high of Rs. 248.35 and intraday low of 237.05. The net turnover during the day was Rs. 11467619.

Source : Equity Bulls

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