Buy Repco Home Finance Ltd For Target Rs.420 - Yes Securities
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Delivered an operational beat; management change could be a trigger
Our view
Repco delivered a 10%/14%/23% beat on our NII/PPOP/PAT estimates, despite undershooting our loan book estimate (marginal contraction v/s marginal growth). While disbursements were in-line at Rs4.8bn, the portfolio run-off was substantially higher (at annualized 19%, was closer to pre-Covid level) underpinned by significant spike in BT Out activity (monthly run-rate reverted to Rs1.2-1.5bn). Reported NIM/Spread improved by material 30-40 bps qoq aided by firm portfolio yield, interest income recovery from NPL accounts and benign funding cost. Incremental lending rate was 10.3% in Q2 FY22, incremental borrowing cost was near 7% (largely from banks - NHB funding share declined) and thus incremental spread was around 3.3%. Credit cost was lower than expected at Rs170mn on account of slight improvement in PAR 30 portfolio and only marginal incremental restructuring (Rs680mn). OTR 2 stands at Rs6.8bn (6% of loans) and OTR 1 at modest Rs320mn. Collection efficiency during the quarter was 95% (ex. OTR but incl. NPLs’ current demand) versus 86-87% in Q1 FY22. Collections are trending well in October also, and management expects GNPLs to decline to 3.5% by March from current 4.3%.
The Board is not renewing/extending the term of current MD & CEO Mr. Yashpal Gupta and would be looking out for an external/professional successor. The planned management change likely manifests promotor Repco Bank’s and the Board’s augmented emphasis on balance sheet growth, in the light of structurally growing demand in affordable housing segment. The appointment of an external CEO would be positive for the stock as it would revive long-run growth prospects. Even on modest growth expectations, Repco trades at a low valuation of 0.7x FY24 P/ABV. Risk-reward is quite attractive considering average 2.4% RoA and 13% RoE delivery over FY21-24. Retain BUY with 12m PT of Rs420.
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