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Asset quality surprises positively; loan growth remains muted

* PAT fell 21% QoQ to INR632m (27% miss) in 4QFY21. While NII was in line, PAT miss was due to higher opex (up 18% YoY, led by CSR expenses and improvement in business volumes) and credit cost (on greater provision cover on S1/S2 loans in anticipation of higher restructuring).

* Performance in 4QFY21 was characterized by healthy NIM of 4.8%, sharp decline in GNPA (down 60bp QoQ and YoY), and pick-up in disbursements (up 6% YoY).

* Balance transfers will remain pronounced in the near future. We model in 8%/12% loan book/PAT CAGR over FY21-24E.

* There could be imminent stress because of the second COVID wave, leading to higher restructuring. However, the steps taken to strengthen collections should lead to better outcomes in ensuing quarters. We have a Buy rating on the stock with a TP of INR440 (1x FY23E PBVPS).

Loan growth muted even as disbursements recover; margin still healthy

* The fact that REPCO is slowly limping back to pre-COVID activity levels is encouraging. New sanctions were up 2% YoY. Disbursements rose 6% YoY to INR6.4b. However, aggression from Banks and large HFCs led to loan book run-off remaining elevated (at 4.8%, non-annualized) and muted loan book growth at 2.5% YoY (flat QoQ).

* Loan mix, on the basis of customer profile and product type (Home/LAP), remained largely stable all through FY21, even as REPCO makes concerted efforts to increase the proportion of salaried customers in the mix.

* Yield moderation has started to manifest itself. Reported yields fell by 70bp QoQ. The same was offset by a 60bp dip in borrowing cost, resulting in largely stable spreads of 3.7%. Reported NIM fell 30bp QoQ to 4.8%, but still continues to remain healthy. Around INR28m of interest income reversal and excess liquidity further contributed to the decline in NIM.

Opex higher than our estimate led by CSR expenses

* While employee expenses fell 5% YoY, other opex was up 57%, led by CSR expenses in 4QFY21. About 80% of CSR expenses in FY21 were back-ended in 4Q. C/I ratio stood at 23% v/s 22% YoY.

Bank term loans replaced by lower cost NHB borrowings

* REPCO continued to borrow from NHB (incremental cost of 4.5%-5%), with its proportion in the borrowing mix more than doubling to 21% in FY21 from 8% in FY20.

* The weighted average borrowing rate fell to 7.1% in Mar’21 (down 30bp from Dec’20).

Highlights from the management commentary

* The management guided at target disbursements of INR30b in FY22 and a loan book growth of 12-15%, assuming no new COVID-19 waves this fiscal.

* In anticipation of a potentially elevated restructured loan pool under RBI OTR 2.0 in 1HFY22, it increased its provisioning buffer during 4QFY21.

Improvement in GS 3 to 3.7% (down 60bp QoQ v/s pro forma) was largely driven by resolutions and upgrades to S1/S2.

* There were no write-offs during 4QFY21. PCR on S3 loans remained unchanged ~40%. REPCO continued its strong focus on recoveries from ‘legacy’ NPA accounts and maintained its aggressive stance on collections. This manifested in a decline in headline GNPA.

* Restructured loans have been classified under S2 and remained unchanged ~0.3%. However, new incremental restructuring under the RBI COVID-19 resolution framework 2.0 could potentially be much higher in 1HFY22.

* REPCO increased its standard asset provisioning cover to ~1% (up 50bp QoQ). This includes a PCR of ~32% on the restructured loan pool and management overlay of ~INR425m (35bp of loan book).

* Total ECL provisions increased by 20bp QoQ and 60bp YoY to 2.4%.

Valuation and view

We expect loan book growth to remain muted even in FY22E. Improvement in asset quality is encouraging as GS 3 fell below 4% after remaining sticky between 4% and 4.3% for the last seven quarters. We see the efforts put in by REPCO to improve collections and achieve resolutions/upgrades in GS 3 reflecting in improved asset quality.

Given the investments being made by REPCO in digitization, we expect it to benefit from productivity improvements and structural enhancements across different stages of the loan lifecycle. Availability of low-cost NHB borrowings will not sustain indefinitely. We expect further benefits from lower incremental cost of borrowings to be limited. We estimate a 12% PAT CAGR over FY21-24E. REPCO trades at 0.85x FY23E P/BV, which is undemanding. We have a Buy rating on the stock with a TP of INR440 (1x FY23E PBVPS).

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