Buy Repco Home Finance Ltd For Target Rs.475 - Yes Securities
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Result Highlights
* Repco Home Finance delivered a steady earnings performance in Q4 FY21, adjusted for interest‐on‐interest refund, higher CSR expenses and conservative provisioning (management overlay provisions raised to 37 bps of loan book).
* With disbursements in Q4 FY21 below pre‐Covid level (just 6% growth yoy v/s 40‐100% growth for similar‐sized and large HFCs) and continued high portfolio run‐off (substantial BT Out ‐ overall run‐down at 85%+ of originations), company remained on a flattish loan growth track. Growth challenges persisted in Southern markets of TN, KTK, Kerala and AP. Management guidance of delivering Rs30bn disbursements in FY22 seems aspirational with substantially lower business in Q1 (likely Rs2‐2.5bn).
* Aided by a sharp decline in cost of funds (driven by re‐pricing of Bank TLs and sustained shift towards NHB re‐finance), the loan spread and NIM stayed elevated. Spread/NIM could stay higher in the near term with further reduction of funding cost.
* A sharp improvement in asset quality (Stage‐3 declined from 4.3% to 3.7%) was the key positive surprise and was underpinned by consistent improvement in collection efficiency and recoveries from large NPLs. With augmentation of management overlay provisions, the overall ECL cover on loan assets increased to 2.4% from 2.2% in the preceding quarter. Management expects a credit cost run‐ rate of around Rs0.5bn for a couple of years.
Our view –
Asset quality resilience and growth pick‐up can re‐rate the stock further ‐ Retain BUY: While growth has been a sticky issue for Repco (higher competition + low operational rigor), the asset quality resilience has been a stand‐out feature.
The latter raises comfort on customer segment, underwriting and collections. This along with consistent strong RoA/RoE delivery can raise valuation further (stock trading at 1x FY23 P/ABV). Additional trigger for stock performance/valuation re‐rating would be a potential stake sale by Repco Bank for raising capital or after receiving a universal banking license approval from RBI. Retain BUY and raise 12m PT to Rs475.
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