Buy Repco Home Finance Ltd For Target Rs.420 - Yes Securities
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Our view ‐ Asset quality recovery pivotal for valuation re‐rating
Though Repco’s PPOP performance was in‐line with our estimates, a higher credit cost from increase in the stress pool (GNPL + OTR at 9.5%) depressed the earnings. Company restructured 5.2% of the portfolio; primarily accounts which were regular or in Stage‐1 on March 31. OTR 2.0 portfolio comprises 85% Home Loans (mainly SE customers) and 15% LAP. The classification of OTR assets in Stage‐2 led to increase in this pool from 8‐9% as of March to ~11.5% as of June. Stage‐3/GNPLs increased from 3.7% to 4.4% on account of slippages from Stage‐2 bucket.
The collection efficiency was impacted during the quarter due to the second pandemic wave and a higher impact on Repco’s portfolio due to concentration of semi‐formal salaried and self‐employed customers and the Southern markets which had a prolonged impact. Collection efficiency in June was around 90% (w/o arrears and excl. demand of restructured assets) and it has improved in July. Credit cost in Q1 FY22 was higher due to significant restructuring (mandated 10% provisions) and increase in Stage‐3 (ECL cover marginally raised). Management expects incremental provisions of Rs200‐250mn in remainder of the fiscal in the absence of third wave.
As we factor lower growth (sluggish disbursement acceleration + persistence of significant BT Out) and build higher credit cost, we revise earnings/BV estimates downwards by 15%/5% for FY22. While anemic growth had been a consistent feature over the past many quarters, the deterioration in asset quality (in the absence of moratorium) could preclude stock’s valuation (0.8x FY23 P/ABV) from re‐rating materially. Thus, key monitorable will be collection efficiency trends which would reflect upon the performance of the stress pool. Retain BUY, but lower 12m PT to Rs420.
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