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Poor execution; all eyes on the new CEO’s strategy

REPCO’s delivery on the operational front (disbursements/collections) under the former CEO leaves much to be desired. It has appointed Mr. K. Swaminathan as MD and CEO and Ms. K Lakshmi as CFO. We look forward to the company’s articulation of its strategy under the new leadership team. Until then, we are placing our trust in the franchise’s ability to turn around and start delivering loan growth and improvement in asset quality

* REPCO reported a 3QFY22 PAT of INR315m (60% miss), down ~60% YoY and 63% QoQ, led by credit costs of ~260bp (annualized).

* Performance in 3QFY22 was characterized by: 1) minor moderation in NIM to 5% (v/s 5.2% QoQ), 2) elevated operating expenses of 1.2%, 3) deterioration in GNPA (up 270bp QoQ), and 4) disbursements declining by ~8% QoQ and 20% YoY, resulting in a 2% YoY decline in AUM.

* Loan growth continues to remain muted, led by REPCO’s inability to significantly improve its disbursement levels and stem the elevated levels of balance transfers.

* At this juncture, it will be important to understand the strategy of the new CEO, who is expected to come on board later in Feb’22, and monitor the company’s action plan to deliver an improvement in asset quality. It has guided at a decline in Gross Stage 3 to less than 4% (excluding the RBI NPA circular) by Mar’22.

* We cut our FY22E/FY23E/FY24E PAT estimate by 22%/5%/4% to factor in lower loan growth and a compression in margin. The risk-to-reward ratio is favorable at valuations of 0.5x FY24E P/BV as a franchise in its current form or even as a potential acquisition target. We maintain our Buy rating on the stock with a TP of INR320 (0.7x FY24E BVPS).

Loan growth remained muted

* Loan book continued to consolidate, with reported AUM of ~INR118b, largely flat QoQ, but down 2% YoY. Run-off in the book moderated a little bit, but still continues to remain high at 18% (annualized), suggesting that balance transfers continue to stay elevated.

* Customer mix between salaried/self-employed and the product mix between Home loans and LAP remained stable on a sequential basis.

* Disbursements stood at INR4.4b, down ~8% QoQ and 20% YoY.

Opex came in higher than our estimate

* Cost-to-income ratio increased to ~22% (v/s 17% in 2QFY22) and opex-toaverage advances grew to ~1.2% (annualized) v/s a run-rate of 0.9-1%.

* The increase in operating expenses was attributed to higher travel expenses and provisions for CSR.

NIM and spreads moderate sequentially, but still remain healthy

* Reported spreads declined by 20bp QoQ and 10bp YoY to 3.8%. This was driven by a 10bp QoQ decline in yields, while the cost of borrowings grew by 10bp to 7.1%.

* Reported NIM stood at 5%, down 10bp YoY and 20bp QoQ.

Significant deterioration in asset quality under RBI’s NPA circular

* GNPA as per the RBI circular rose to 7% (v/s a reported S3 of 4.3% in 2QFY22). Excluding the impact of the RBI circular, GS3 stood at 4.6%.

* Total ECL provisions increased by 35bp QoQ to 3.5% (of the loan book). This included COVID-19 provisions of INR170m (~14bp of the loan book). Credit costs stood ~260bp (annualized).

Valuation and view

* Loan book growth continues to remain muted on the back of tepid disbursements, even as there will be a minor pressure on spreads/margin in the subsequent quarters.

* REPCO trades at 0.5x FY24E P/BV and the risk-to-reward ratio is still very favorable. Pending articulation of a new strategy under the incoming CEO, we continue to build ~7% CAGR in loan growth over FY22-24E and model in a RoA/RoE of 2.5%/13% over FY23-24E. Loan growth estimates could change meaningfully if there is a significant change in the approach/strategy under the new CEO, who is expected to assume office later in Feb’22. We maintain our Buy rating on the stock with a TP of INR320 (0.7x FY24E BVPS).

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