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‘Weak 3Q; growth visibility must for re-rating’

Our view

Repco delivered a weak performance in Q3 FY22 that was characterized by muted disbursements (lower 8% qoq/20% yoy; and 30% below our estimate), de-growth in loan assets (1% qoq/2% yoy), higher opex additionally weighing on PPOP, material increase in GNPL (even adjusted for RBI circular impact) and larger credit cost. NIM coming-off by 20bps qoq to 5% was understandable, as Q2 interest income had interest recoveries from NPL customers.

GNPL/Gross Stage-3 assets rose to Rs8.2bn (7% of loan assets) with the addition of loans worth Rs2.75bn (2.35%) due to RBI’s November 12 circular. However, even adjusted for this regulatory impact, the GNPLs rose by 15% qoq (70 bps) highlighting significant gross slippages from Stage-2 bucket. GNPLs worth Rs400mn (35 bps) were written-off during the quarter. Credit cost was substantially large at Rs760mn (annualized 2.6%), wherein the key component was additional provisions of Rs450- 500mn on the recategorized pool, besides provisions related to write-off and towards increase in Stage-3 assets in the normal course.

On the back of lowered growth and NIM assumptions, we cut FY22-24 earnings/ABV estimates by 10-15%/8-10%. No improvement in growth trajectory despite macro tailwinds is confounding and highlights issues with operational rigor. Expectations now shift to initiatives/strategy of soon-to-join MD & CEO, Mr. K Swaminathan, who has around 35 years of experience in the field of banking. However, any constructive changes would only gradually manifest in business outcomes. Low valuation (0.6x FY24 P/ABV) and healthy base profitability (2%+ RoA) protects meaningful downside, but growth visibility is must for re-rating.

Disbursement & AUM Growth

File logins have improved, suggesting disbursements would be better in Q4 than Q3.

Expecting disbursements to be near pre-Covid level by Q2 FY23 - New MD & CEO expected to join in a month.

ATS of portfolio has been stable at around Rs1.5mn

Asset Quality & Credit Cost

Additional provisions of Rs460mn in Q3 pertaining to RBI circular impacted pool – while RBI has provided some relief for implementing the circular, the co. does not intend to reverse any provisions.

Expect GNPL (ex RBI impact) to correct near 4% by March.

GNPLs on the book built after 2018 are much lower at ~2%

Product/Occupation wise GNPL (post RBI circular): HL 6.3% and HE 10.2%; Sal 3.8% and SE 10%.

Technical write-off of Rs400mn in Q3.

Only Rs100mn of principal loss experience in the history of the company.

NIM & Opex

Rs4bn of Cash & Equivalents on BS - Rs20bn of unutilized credit lines from Banks.

Co not expecting significant increase in borrowing cost in Q4 - incr. CoF of 6.9%.

Entire loan book is on floating rate, inked to the internal benchmark rate.

Existing 5% NIM unsustainable in long term – co. expects it to be in the range of 4.2-4.5%.

Q3 had CSR spend of Rs18mn.

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