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Improvement in growth seems structural

Encouraging growth, NIM and asset quality

Repco delivered 8%/10%/29% NII/PPOP/PAT beat on our estimates driven by:

* Stronger-than-expected disbursements (up 16% qoq and 11% above est.) and loan growth (2% qoq v/s expected flat) despite no portfolio buyout (Rs700mn in Q1).

* Annualized portfolio run-off rate has stabilized at 18% with moderation in BT Out run rate (Rs0.8bn/month now).

* NIM improved by 20 bps qoq, instead of expected decline, with 30 bps expansion in portfolio yield (45 bps rate hike taken in July-August) and only 10 bps increase in CoF (bank loans linked to 6m/1yr MCLRs).

* Much lower than estimated credit cost was underpinned by stable GNPLs - significant slippages from the restructured pool (billing commenced between MayJuly) were mitigated by robust NPL recoveries (focused recovery efforts).

Management expects further improvement in growth and asset quality

Repco expects loan book growth of 7-10% for FY23 without any incremental portfolio buyouts. It estimates disbursements momentum to accelerate in coming quarters on the back of growth enabling changes implemented across locations. Some of them include a) clear policy and communication of incentives, b) decentralization of sanction process for loans up to Rs3.5mn, c) simplification of certain processes which has improved productivity, d) enhanced focus on BT IN and e) calibrated introduction of Top-up Loans. Notably, there has been no change/relaxation in policies related to credit/property underwriting and customer selection/pricing.

Management estimates credit cost in H2 FY23 to be lower than H1 FY23 (Rs425mn), as slippages are estimated to be much lower. Marginal slippages are envisaged from the remaining Std. restructured book (4.5% of loans), of which about 1% is current/0 dpd. The repayment behavior of this book has been comforting since the billing started in May-July. Stage-2 assets stood at Rs16bn (13% of loans; ECL cover at Rs1.2bn) v/s ~Rs17bn as of June and ~Rs19bn as of March. It is expected to further decline in coming quarters. Management estimates GNPLs at 5-5.5% (<Rs7bn) by year end v/s 6.5% now.

Upgrade earnings; Reiterate BUY

Our FY23/24 earnings estimates undergo 4-11% upgrade on bettering of growth, NIM and credit cost assumptions. We now expect Repco to deliver loan portfolio and earnings CAGR of 9-12% over FY22-24 with avg. RoA/RoE delivery of 2.4%/12% respectively. Valuation at 0.6x FY24 P/ABV can re-rate significantly on growth progression. Reiterate BUY with increased 12m price target of Rs345.

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