Buy Repco Home Finance Ltd For Target Rs.299 - HDFC Securities
Repco Home Finance Ltd (RHFL) is a niche player in the small-ticket housing finance market (median Rs 1.5 mn). It focusses on underserved markets, especially the self-employed in Tier 2 and 3 cities. Factors like low mortgage penetration, government’s impetus for ‘Housing for All’ and incentives for affordable housing bode well for the company. Long term prospects of the sector look good but near term growth prospects are seen to be muted due to the standstill situation of the economy brought about by the lockdown due to Covid-19. Overall core housing credit growth is expected to moderate to single digit in FY21E - lower than three-year CAGR of 16% led by the Covid-19 induced crisis. The company has witnessed a steady growth in the past by increasing its geographical footprint by deepening reach selectively in existing regions and expanding to new regions, continuing focus on under penetrated markets. Comfortable capital adequacy levels and healthy profitability, balanced portfolio mix, robust risk management systems and processes, strong foothold in south India with an established track record, stable and experienced senior management team bode well to capitalise on underpenetrated mortgage financing opportunity of the country.
The year gone by was a challenging one for HFCs from both a microeconomic and macroeconomic point of view but the company’s financial performance and overall financial health remained strong. The company will continue to maintain the non-housing book at or below 20% with continued focus on small ticket loans and will strike a right balance between salaried and non-salaried loans which help in keeping the balance sheet quality robust. Once the current uncertainty is over, the company will attempt to restart its granular retail only growth strategy. Target segment of the company will continue to be small salaried customers employed with MSMEs and SMEs and unsalaried customers running MSMEs, small shops and the like with aspirations to own a house in Tier 2, Tier 3 and Tier 4 towns.
Valuations and View:
Repco Home Finance is in a niche segment within housing finance – lending to unsalaried MSME owners for property in Tier 2,3 and 4 towns with an average lending of Rs.15 lakhs. While the opportunity is large, the recent Covid related disruption may lead to some asset quality issues for the company for the near term. However once the economy is back on track, a lot of their issues can get resolved soon. Repco faced multiple issues like slow growth in home market, liquidity crisis in NBFC industry and rising delinquencies in non-salaried segment. Problems of the past (sand mining and the registration ban in Tamil Nadu) continue to impact the company’s growth. As a result,
Repco underwent huge de-rating with 1-yr forward price to book multiple falling to less than 1.0x from a peak of 4x during FY17. Since then, it has added capacity to grow business outside home turf and added specialised branches to focus on recovery of bad loans. At such low valuations, Repco could be a good acquisition candidate.
We think the base case fair value of the stock is Rs.268 (0.9xFY22E ABV) and the bull case fair value of the stock is Rs.299 (1.0xFY22E ABV) over the next two quarters. Investors can buy the stock at the LTP and add on dips to Rs. 221-225 band (0.75xFY22E ABV)
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