Things turning around for the better; asset quality improves

* REPCO reported a 1QFY23 PAT of INR808m (22% beat), driven by lower annualized credit costs of ~80bp (PQ: 2.1% and PY: 2.6%). NII declined 6% QoQ to INR1.33b (7% miss) while provisions at INR 237m were much below our estimate of INR500m.

* The new management team, led by Mr. Swaminathan as the MD/CEO, offers a different strategy and a new ray of hope, and we are indeed seeing early signs of execution and turnaround. However, we would wait for: a) the asset quality outcome of the restructured pool; b) further improvement in disbursements; and c) decline in BT-OUT run-rate before turning constructive on the stock again.

* Our earnings estimates are largely unchanged and we maintain our Neutral rating with a TP of INR200 (premised on 0.4x FY24E BVPS).

Loan growth muted but disbursements showing signs of improvement

* The quarter was characterized by ~7% QoQ growth in disbursements, leading to a subdued 1% QoQ growth in the loan book to ~INR119b. Loan book is depicting early signs of end of the consolidation period.

* We model loan growth of 7%/10% for FY23/FY24, respectively, fueled by an improvement in disbursement run-rate.

NIMan d spreads moderate sequentially

* Reported spreads contracted ~40bp QoQ/ ~50bp YoY to 3.3%. CoF was stable sequentially. Yields declined due to lower interest rates offered for customer retention and waiver of penal fees on a few NPA accounts.

* Margin contracted 50bp QoQ primarily due to a moderation in yields.

Asset quality improves; credit costs decline sharply

GNPA contracted ~50bp QoQ to 6.4%, while the company increased the PCR on S3 loans by ~5pp QoQ to ~37%. REPCO also made floating provisions of INR200m for potential slippages from the restructured pool.

*  ECL/EAD was stable sequentially at 4%. Credit costs in 1QFY23 stood at ~80bp (annualized; PQ: 2.1% and PY: 2.6%).

Other details

* Opex grew 38% YoY to INR339m (in line).

* CRAR was healthy at ~34% and the company remained over-capitalized in the absence of any meaningful growth in loan book

Key highlights from the management commentary

* Management retained its loan growth guidance of 10-11% and credit costs of INR800m-1b in FY23E; the company stated that the GNPA levels will depend on slippages from the restructured pool.

* Total prepayments rate dipped 3% sequentially in 1QFY23. Annualized prepayments rate declined to 18% from 21%. Management guided that it expects the BT-OUT rate to decline since REPCO is retaining customers by giving concessional interest rates where there is merit

Valuation and view

* REPCO has reported an improvement in asset quality in a seasonally weak quarter, but we remain watchful of the potential slippages from the restructured pool and their impacts on GNPA levels and credit costs.

* We expect NIM to contract ~40bp/10bp to 4.7%/4.6% in FY23/FY24, respectively, given that REPCO is now focused on customer retention and exhibiting a growth in its loan book.

* The company trades at 0.4x FY24E P/BV. While risk-reward appears favorable at this valuation, we would wait for further proof of improved execution ability before turning constructive on the stock again. Maintain Neutral with a TP of INR200 (based on 0.4x FY24E BVPS).

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