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Spreads improve; asset quality stable

* Repco Home Finance’s (REPCO) 2QFY21 PBT was up 6% YoY at INR1.08b. On the back of a lower tax rate (1.3%) in the base quarter, PAT declined 20% YoY to INR808m. The quarter was characterized by a gradual pick up in business volumes, improvement in spreads, and focus on collections.

* The company created INR72m in provisions in 2QFY21. Collection efficiency stood at 93% in Sep’20.

* On the back of strong spreads and conducive liquidity environment, we upgrade our estimates by 10-12% for FY21E/FY22E. We expect a RoE of 14- 15% over FY21-23E and a RoA of 2.4%. We expect the focus on collections to take precedence over growth in the near term. Maintain Buy

Business volumes pick up; yields improve

* On a low base, HL/LAP disbursements picked up 2x/3x QoQ, although it is still at 70% of pre-COVID levels. Loans were flat QoQ but grew 4% YoY to INR121b.

* Yields improved by ~30bp QoQ to 11.6% (stable YoY), and cost of funds declined by 10bp sequentially to 8.2%. This led to a 40bp improvement in spreads to 3.4% (higher than their long-term average). As per the management, the improvement in yields is unlikely to sustain ahead.

Lower provisioning supports PPOP; asset quality improves

* Opex jumped 9% QoQ to INR257m. As business volumes have started to pick up, these should return to pre-COVID levels in ensuing quarters.

* GNPL ratio declined 10bp QoQ to 3.95%, led by a 10bp/20bp improvement in HL/LAP. Over the past three quarters, Stage 3 PCR has increased to 41% from 29% and total ECL provision to 2% from 1.5%. The company carries management overlay related provisions of INR512m (40bp of loans).

Highlights from the management commentary

* Expect 8–10% AUM growth in FY21 and disbursements of INR7-8b in Q3 and ~INR9b in Q4.

* Incremental yields for HL/HE at 10.39%/13.22% (1QFY21 10.46%/13.15%).

Valuation and view Over the past year, REPCO has reduced its dependence on capital market borrowings – 96% share of borrowings now come from banks and National Housing Bank (NHB). Issues of the past (sand mining and the registration ban in Tamil Nadu) continue to impact the company’s growth. We expect disbursements to pick up in 2HFY21 on back of buoyancy in RE sector. However, loan growth is likely to be in low digits in FY21/FY22. Improvement in asset quality is encouraging. However, a clearer picture would emerge toward the end of FY21. Maintain Buy with a TP of INR325/share (0.8x Sep’22E BVPS).

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