Repco Home Finance - Asset quality managed well; growth yet to catch up - ICICI Securities

Repco Home Finance's (Repco) Q3FY21 earnings were better than expectations with PAT growth of 14% YoY / flat QoQ. Noteworthy positives: 1) Catch-up in collection efficiency surpassing pre-Covid levels, which helped contain stage-3 plus restructuring pool at 4.3%. 2) Profitability preceded growth - NIM was up 40bps QoQ to 5.1%, aided by lower cost of funds and recoveries from written-off accounts. On the other hand, AUM growth continued to moderate as disbursements remained down (15% YoY) coupled with higher balance transfer cases (10% annualised run rate). The quarter allays the concern around anticipated volatility in asset quality trends giving confidence that credit cost can be managed at <1%. Though growth momentum lags peers, superior NIM and lower credit cost can sustain Repco's RoAs at >2% and RoEs at >13%. With this profile, the company can command 1.0x adj. BV multiple (1-year forward) leading to a revised target price of Rs 362 (earlier: Rs 305).

- Collection efficiency catch-up commendable; stage-3 plus restructuring pool well contained: Collection efficiency (excluding arrears) catch-up is commendable - touching the 97% mark by Dec (vs 93% in Sep, ~70% in Aug and better than pre-Covid level of 95-96%. Consequently, rise in proforma stage-3 assets was well contained at 4.3% (from reported 3.95% in Q2FY21). This includes proforma slippages of Rs860mn and restructuring of Rs335mn (~0.3% of advances). Actual restructuring was much below company's initial estimate of 2-3% though it is conservatively classified in stage-3 rather than stage-1/2 for peers. Stage-2 assets witnessed a mild uptick, but it does not seem significant. Repco created provisioning of Rs200mn on proforma slippages (21% coverage) and Rs108mn on restructuring (30% coverage). Consequently, credit cost came in at Rs220mn (75bps). Drawing comfort from asset quality trends, we are building-in credit cost of 65-80bps each year in FY21E, FY22E and FY23E.

- Disbursement momentum yet to kick-in; AUM growth derails: Q3FY21 disbursements were 15% lower YoY at Rs5.5bn (albeit up 18% QoQ) and FY21-YTD disbursements are >40% lower vs FY20. Run rate of disbursements, though improving QoQ, continues to lag peers. Monthly disbursement run rate for Q3 was at Rs1.8bn, yet lower than its guided and historical run-rate of Rs2.0bn-2.5bn. It is treading cautiously in its prime segment of non-salaried borrowers (reflected in disbursement ratio of salaried to self-employed being down to 2.0x:1.8x compared to the recent past average of 2.0x:3.0x). Also, competitive intensity in salaried segment is leading to elevated balance transfers (outward) at ~10% that derailed loan growth to <4% YoY. We believe growth will continue to be modest and this consolidation phase will stretch in the interim. We are building-in loan growth of 4%, 5% and 9% for FY221E, FY22E and FY23E respectively.

- NIM expanded further by 40bps QoQ led by decline in funding cost: NIM during the quarter improved significantly by almost 40bps QoQ to 5.1% benefitting from lower funding cost and recovery from written-off accounts. As guided by the management, cost of funds contracted 30bps during the quarter to 7.9% from 8.2%, largely on account of lending from NHB and MCLR revision on bank borrowings. Company has raised Rs2bn from NHB and completely run down its NCDs and CP exposure to zero replacing them with bank borrowings at 30-40bps cheaper rate. Its recovery of Rs90mn from technically written-off accounts reflected on income, which supported yield improvement. The stance of prioritising profitability over growth would continue for a while and we are building-in margins in the range of 4.5-4.6% for FY21E-FY23E.

Shares of REPCO HOME FINANCE LTD. was last trading in BSE at Rs.266.4 as compared to the previous close of Rs. 268.9. The total number of shares traded during the day was 40200 in over 1415 trades.

The stock hit an intraday high of Rs. 270.35 and intraday low of 258.2. The net turnover during the day was Rs. 10556839.

Source : Equity Bulls

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