Buy Repco Home Finance Ltd For Target Rs.225 - Yes Securities
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Growth uptick key for re-rating
Our view
Repco’s Q4 FY22 PAT was significantly below our estimate on higher credit cost, even though NII and PPOP were in-line. Loan book was sequentially flat as expected, but disbursements and portfolio run-off were 8-10% higher than our expectations. March disbursements were healthy at near Rs3bn (v/s Rs2.8bn yoy), and BT Out in the quarter was unusually higher at Rs4.6bn (Rs2.84bn in Q3 and Rs2.48bn in Q4 FY21). BT Out has come-off a bit in current quarter, and management expects it to moderate post the introduction of a Top-up loan product (CIBIL linked) and interest rate reduction powers (up to a certain level) for Branches and Regional Offices. Disbursements in Q1 FY23 is expected near Q4 FY22 level of Rs6bn and for the whole year is targeted at Rs30bn (Rs17.7bn in FY22). About 8-10 branches would be added in FY23.
Stage-3 assets were stable in abs. terms with elevated slippages (due to daily stamping) being offset by upgrades and recoveries. The <90 dpd NPL pool reduced from Rs2.75bn as of Q3 FY22 to Rs2.4bn. There were no write-offs in the quarter. Stage-2 assets and OTR pool (Rs6.8bn) were also flat qoq; but provisions on latter were raised from 10% to 15% (billing to start from Q2 FY23 - no change in stress assessment though). Further, ECL cover on Stage-3 loans was also increased marginally. Management attributed higher provisions to strengthening of the balance sheet and intends to further increase coverage on NPLs (currently 32%). Despite the rising rate environment, NIM/Spread outlook seems resilient considering 100% loan assets on floating rate (semi-annual reset).
Growth commentary from the new MD & CEO, Mr. K Swaminathan, is better than his predecessor. However, the execution and enabling operational changes needs to be closely monitored. Along with this, the incremental slippage run-rate and quantum of upgrade & recovery would be critical to stock’s performance. Repco trades at an undemanding valuation of 0.4x P/ABV and 3x P/E on FY24 estimates. Retain BUY.
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