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Earnings beat despite slight growth miss

Repco delivered a good quarter with earnings beat of 10% encompassing the impact of some structural changes and a small compression in NIM. The key positive highlight of co’s performance was sustained improvement in asset quality in a usually soft quarter, which drove not only negligible credit cost but also NPL coverage improvement. The roll-out of new loan origination system across branches in December impacted disbursements for the quarter (which notably still was reasonably healthy in pre-Covid context). With core BT Out (8-9%) nearly stable, and some CLSS subsidy credit (~Rs400mn), the loan book grew just by 1% qoq. With loan portfolio on semi-annual reset and large borrowings linked to MCLR, the portfolio spread/NIM compressed by 10 bps qoq to 3.3%/4.8%. The non-employee opex was higher on account of non-recurring fee payments for consultancy on tech & strategic changes

Management aspiring for 12-15% growth in FY24

The co. has implemented growth enabling operational changes such as 1) better incentive policy and prompt payouts, 2) decentralization of sanction for loans up to Rs2.5mn, 3) simplification of processes which has improved efficiency and TAT, 4) stronger engagements with DSA and Developer channels, 5) close monitoring of business and pipeline by the Head Office, 6) sharpened focus on BT IN, and 7) introduction of Top-up Loans to moderate BT Out. We believe these changes have improved disbursement rigor, and which would manifest better after stabilization of new LOS. Management is confident about disbursing Rs36-40bn next year, which is likely to result in 12-15% loan growth with some improvement in BT Out.

Asset quality expected to further improveNIM to stabilize

Our FY23/24 earnings estimates undergo 4-11% upgrade on bettering of growth, NIM and credit cost assumptions. Persistent recovery efforts, buoyancy in property markets and healthy collateral underwriting have been yielding NPL reduction for Repco. From 7% as of March, the GNPL level has declined to 6.2% (the base hasn’t grown much). There were no significant slippages from the std. restructured book (3.5-4% of loans) and collections on non-OTR standard assets remains strong which was reflected in absolute reduction in Stage-2 assets. Co. expects GNPLs to decline to 5.5-6% by March and to below 4% by end of next fiscal. Credit is expected to be benign-to-normal in coming quarters. NIM/Spread could likely stabilize henceforth as rate hikes of 70-80 bps (of past 6 months) come into play

Valuation can re-rate significantly as growth trajectory becomes clear

Repco’s valuation should track improving asset quality and growth trends in the long run. While co’s delivery on asset quality has been comforting, a secular improvement in loan book growth is keenly awaited. The structural growth manifestation would become clear over the next couple of quarters, in our view. We expect 12% loan CAGR over FY23-25 with avg. RoA/RoE delivery of 2.4%/12%. Growth beyond 15% and increase in dividend payout can raise RoE, given high Tier-1 capital.

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