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PAT beat aided by lower credit costs; asset quality stable

* REPCO’s PAT fell 17% YoY, but grew ~15% QoQ to INR712m (19% beat), led by lower annualized credit costs of ~60bp (PQ: 0.8%/PY: 0.6%) in 2QFY23.

* NII grew 3% QoQ to INR1.4b (in line). Provisions, at INR188m, were below our estimate of INR300m. PPOP improved ~6% QoQ to INR1.1b (in line)

* GNPA (including the RBI NPA circular) was largely stable QoQ at 6.5% (PQ: 6.4%). REPCO raised the PCR on S3 loans by ~6pp QoQ to ~43%. ECL/EAD increased ~30bp QoQ to 4.3%.

* The new management team, led by Mr. Swaminathan as the MD/CEO, offers a different strategy and a new ray of hope, and we are indeed seeing signs of execution and turnaround.

* However, we would wait for: a) the asset quality outcome of the residual restructured pool that has resumed repayments but still remains vulnerable; b) further improvement in disbursements; and c) decline in BTOUT run-rate, before turning constructive on the stock again.

* Our earnings estimates are broadly unchanged. We model loan growth of 8%/10% in FY23/FY24, respectively, and PAT CAGR of 31% over the same period. With an RoA/RoE of 2.4%/12.4% in FY24E, we maintain our Neutral rating on the stock with a TP of INR270 (premised on 0.6x FY24E BVPS).

Loan growth showing early signs of pick up led by healthy disbursements

* The quarter was characterized by ~16% QoQ growth in disbursements, leading to 2% QoQ growth in the loan book to ~INR120.7b. It appears that the loan book consolidation period is now behind and the company will look forward to exhibiting a steady loan book growth.

* Disbursements grew 92% YoY to ~INR13.9b in 1HFY23 (PY: ~INR7.2b).

NIM and spreads improve sequentially

* Reported spreads expanded ~20bp QoQ but declined ~60bp YoY to 3.4%. Reported margin improved ~20bp QoQ, driven by an improvement in yields, while the increase in borrowing cost remained benign.

* REPCO suggested that it will pass on the rise in the CoB to its customers and guided for margins in the range of 4.75-5.0% and spreads of 3.0%.

Performance of the restructured pool better than expectations

* Restructured loans have exited the moratorium period. Out of the total restructured pool of INR7b, ~INR1.75b slipped into NPA and ~INR3.8b is in the overdue pool. Remaining ~INR1.2b of exposures have been collected and closed. Management was confident that the concerns on slippages and elevated credit costs from the restructured pool were behind.

* Further, the company was able to contain the slippages from the nonrestructured book and also witnessed significant recoveries from the nonrestructured NPA pool. Prudent collection efforts and recoveries on part of the company should lead to further asset quality improvement.

Key highlights from the management commentary

* The company guided that it would be able to scale up the loan book to INR127- 129b by the end of the year aided by healthy disbursements and decline in BTOUT run-rate.

* The company guided for GS3 of ~5.4-5.5% by Mar'23 and expects the credit costs to be lower than the guided levels of ~INR1b in FY23.

* It did not sell any loans to ARCs in 2QFY23 and recoveries were organic in nature.

Valuation and view

* REPCO reported a largely steady asset quality despite prior concerns around slippages from the restructured pool. We, however, still remain watchful of the potential slippages from the residual restructured pool and its impact on GNPA levels and credit costs.

* We expect NIM to contract ~45bp YoY to 4.6% in FY23, given that REPCO is currently focused on customer retention and is exhibiting a healthy growth in its loan book. While risk-reward appears favorable at current valuation of ~0.6x FY24E P/BV, we would wait for further proof of improved execution ability before turning constructive on the stock again. Maintain Neutral with a TP of INR270 (based on 0.6x FY24E BVPS).

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