Buy Repco Home Finance Ltd For Target Rs.375
Resilient asset quality performance raises confidence – Retain BUY with 12m PT of Rs375
Repco’s Q3 FY21 operating performance was ahead of our expectations with 9‐12% beat in NII, PPOP and PAT. This was largely driven by NPLs/w‐off accounts recoveries/resolution and consequent income (~Rs100mn) which was reflected in NII line. Reported NIM jumped to 5%+ in Q3 FY21, which otherwise would have improved to a smaller extent based only on funding cost decline. The reported borrowing cost came‐off on the back of re‐pricing of bank loans and increased share of low‐cost NHB borrowings over the past two quarters. Portfolio Yields for Repco remain relatively firm, despite the company having reduced rates by 70‐75 bps since April 2020, due to higher quantum of BT Out and semi‐annual repricing mechanism.
Portfolio growth (4% yoy) continues to disappoint, even as disbursements improved (Rs5.51bn v/s Rs4.7bn in Q2), due to sustained intense competition in the form of BT Out (was around Rs3.5bn in Q2/Q3). While management’s focus and improving housing demand would drive higher disbursements in coming quarters (disbursements targeted at Rs7bn in Q4), sustained elevated loan takeovers from banks could constrict loan growth from materially improving.
Asset quality resilience (Proforma NPL at 4.3%, including 0.3% restructuring) surprised positively and the management is upbeat on pulling back NPL levels in Q4. The confidence stems from collection efficiency (without arrears, advances and pre‐ closures) recovering to the pre‐Covid level of 96‐97% (93% in September), much lower‐ than‐expected restructuring, smaller 60‐90 bucket (1‐1.5% of loans) and encouraging trends in hard bucket recoveries/resolutions. Credit cost in the current quarter is likely to be lower than Q3.
We broadly maintain earnings/ABV estimates, as downward revision in growth and credit cost nullify each other. Strong asset quality performance should raise street’s confidence in the management and on the various initiatives taken for mitigating risks over the past couple of years. Stock trades at 0.8x FY23 P/ABV for 2.2‐2.3% RoA delivery and an estimated 15% ABV compounding.
Management Commentary Loan Growth, Disbursements and BT
* Portfolio growth at 4% due to intense competition from banks – Repco cannot compete with Banks on rates
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