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Outperforming low-ball expectations

REPCO’s 3Q performance surprised positively on several fronts- (1) margins improved aided by falling CoF, (2) the rise in pro forma stress was measured, (3) restructuring undershot previous management guidance and (4) stage III coverage improved. We maintain ADD with a revised target price of INR 306. Attractive valuations, better-than-expected asset quality performance and the company’s comfortable capital position underpin our stance.

* Strong PPOP growth aided by recoveries: At ~INR1.3bn, REPCO’s PPOP grew 22.3/11% YoY/QoQ, and was driven by (1) sticky asset yields, (2) falling CoF (-50/-30bps) and (3) recoveries from written-off accounts of ~INR 90mn. Adjusted for said recoveries, PPOP would have grown 13.7/3.2%.

* Pro forma stress evident, but not worrisome: On a pro forma basis, REPCO’s GS-III rose ~30bps sequentially to 4.3% and was ~100bps higher than reported GS-III. Until 3QFY21, REPCO restructured ~INR 360mn (~30bps of AUM) undershooting the management’s earlier guidance of ~INR2-3bn. So far, REPCO’s performance on this front, in a challenging external environment, is creditable. We remain conservative and project GNPAs of 5.2% in FY21E.

* In-line provisions: Non-tax provisions rose sharply (+92/208%) to ~INR 220mn and were broadly in line with estimates. Consequently, reported Stage III coverage also rose 1526/245bps to 43.8%. Further, REPCO holds an ECL cover of ~30% on the pool of restructured loans.

* Business traction: Even as REPCO clocked a sharp sequential rise (+23.2%) in disbursals, they came in below the management’s earlier guidance. Further, AUM growth slowed to just 3.7% YoY with core home loan growth slowing to ~3.5%. We build an AUM growth of 8.6% over FY21-23E.

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