Repco Home Finance - Stage-3 pool settles lower; growth lags - ICICI Securities

Repco Home Finance's (Repco) Q4FY21 earnings exceeded our expectations with PAT growth of 33% YoY (3% earnings growth for FY21). Stage-3 pool being contained at 3.7% and credit cost managed sub-1% for Q4FY21 and 0.7% for FY21 came in as a positive surprise. However, covid second wave disruption and extended impact in Tamil Nadu throw in uncertainty for FY22. Disbursements failed to cheer with a mere 6% YoY growth in Q4FY21 (down 30% in FY21). This coupled with elevated balance transfer weighed on AUM growth (2% for FY21). Though growth momentum lags peers, superior NIM and lower credit cost can sustain Repco's RoAs at >2% and RoEs at >13%. We believe the company's business franchise is currently undervalued - stock trades below FY23E book and 7x earnings, and is available at <0.2x AUM. Maintain BUY with a target price of Rs650. Key risks: fundamentally weak performance derailing growth, and quality of credit amidst covid disruption.

- Stage-3 pool well contained; covid second wave disruption key monitorable: Against the apprehension about rise in stage-3 assets, the pool was contained at 3.7% in Q4FY21 vs Q3FY21 proforma stage-3 of 4.3%. Product-wise, housing loans' stage-3 was managed at 3.8% (3.2% in FY20) while LAP stage-3 inched up to 6.6% from 5.6%. Based on customer profile, stage-3 for salaried customers was contained at 1.6% vs 1.2% YoY while for self-employed it was much higher at 6.7% (5.8% in FY20). Collection efficiency in Q4FY21 was near pre-covid levels of 95-96% (albeit lower than the 97% in Dec'20). Second wave disruption would however have derailed collection efficiency in Q1FY22. Amidst the challenging environment, we expect stage-3 pool at 5-6% in the initial part of FY22.

- FY21 credit cost at less than 70bps: Credit cost of Rs292mn (sub-1% for Q4FY21) was primarily towards stages-1/2 assets, thereby exiting FY21 with credit cost at less than 70bps. It carries management overlay of Rs425mn (35bps of advances). Overall, Repco is carrying cumulative provisions of 2.4% against stage-3 assets of 3.7%. We are building-in credit cost of 1.4%/0.6% for FY22E/FY23E respectively. Restructuring remained stable at 0.3% (included in stage-3), but restructuring under resolution framework 2.0 (not coexisting with moratorium) can be relatively higher in FY22.

- AUM growth moderate as low disbursements and high balance transfer weighs: Disbursements grew by only 6% YoY in Q4FY21 thereby exiting FY21 with 30% lower disbursements vis-à-vis FY20. Against the guided monthly disbursement run-rate of Rs2.2bn-2.5bn, Q4FY21 disbursements were marginally lower at Rs6.4bn due to Tamil Nadu election impact. Consequently, loanbook growth further moderated to 2% (from 5-7%) to Rs121bn (almost flat QoQ), which shows that the company is still very conservative in lending compared to peers. In terms of geographical distribution, Maharashtra and Gujarat loanbooks have grown in the range of 7-9%, while southern states (TN, Kerala, AP) derailed the growth momentum. Also, competitive intensity as well as Repco's high lending rate vs peers is leading to elevated balance transfer (outward) at Rs4bn-5bn resulting in lower net portfolio accretion. Going forward, we are building-in loan growth of 2% and 6% for FY22E and FY23E respectively.

- NHB borrowing aids funding cost; benefit passed on resulting in lower spread: During Q4FY21, Repco borrowed a further Rs4bn from NHB, which carries an average cost of 5.7%. Overall, NHB funding now comprises 21% of total borrowings vs 16.2% QoQ and 7.8% YoY. This has helped Repco completely run down its NCDs and CP exposure to zero. Further Repco Bank (10.5% of total borrowings) has reduced rates by 30bps. This supported almost 60bps decline in funding cost QoQ to 7.3% (125bps decline YoY). The benefit in funding cost was passed on to the borrowers for Repco to be competitive. It had selectively reset lending rates lower (to prevent balance transfers) and yields too declined 70bps to 11%. Spreads thereby reduced marginally to 3.8% and NIMs at 4.8% (vs 5.1% in Q3FY21). Overall, we are building-in flat margins for FY22E and FY23E.

- CSR expenditure leads to higher opex: Other expenses came in higher - up 80% YoY as well as QoQ. Company contributed Rs54mn in Q4FY21 towards CSR activities; full-year CSR expenditure was Rs69mn (vs Rs15mn). Adjusting for this, non-employee operating cost would have declined 4% in FY21. Employee cost was flat though headcount reduced QoQ (from 1,010 in Dec'20 to 980 in Mar '21).

- Repco MFL PAT down 29% YoY in FY21: Repco Microfinance Limited (Repco MFL) loanbook declined 20% YoY to Rs8.6bn. On profitability, it reported Rs396mn PAT in FY21 (vs Rs560mn in FY20) translating into ~4% RoA and 17% RoE. The parent firm, Repco Home, received dividend of Rs22mn and share in profit of Rs126mn against cumulative equity investment of Rs220mn.

Shares of REPCO HOME FINANCE LTD. was last trading in BSE at Rs.376 as compared to the previous close of Rs. 368.1. The total number of shares traded during the day was 20862 in over 1099 trades.

The stock hit an intraday high of Rs. 380 and intraday low of 370.65. The net turnover during the day was Rs. 7796202.

Source : Equity Bulls

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