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A steady performance

Overall good quarter with RoA/RoE sustained near 3%/16%

Repco delivered 2% beat on our PAT expectation, aided by lower opex and higher penal & treasury income in the quarter. Disbursements were lower than our estimate, spread/margin moderation was as per expectation and asset quality further improved as was guided by Management. RoA/RoE were sustained near 3%/16% for the third consecutive quarter.

Disbursements stood at Rs7.6bn v/s Rs8bn in Q2, and it was impacted by floods in some districts of TN during December. Annualized portfolio run-off at 15% was lower than 17% in Q2 FY24 with sustained low BT Out. Hence, notwithstanding slightly moderate disbursements, the loan portfolio grew in-line with our expectation by 2% qoq/8% yoy. NIM came-off by 10 bps qoq from a multi-year high of 5.4% in Q2 FY24 with CoF (calc.) inching-up by 10 bps and Portfolio Yield (calc.) remaining largely stable. Borrowing mix shifted further towards Banks and funding cost of bank loans increased by 10 bps qoq. The loan mix shifted incrementally towards LAP and Self-Employed customers.

Asset quality saw material improvement yet again with GNPLs declining by Rs0.2bn during the quarter. There were no write-offs, and the slippages continued to trend <2% (annualized basis) and the NPL recoveries/upgrades continue to be materially higher than slippages. Repco achieved headline GNPL reduction of Rs1bn in 9M FY24 which was the target for the whole year. Credit cost was negligible due to improvement in asset quality. Repco carries significant overlay provisions of Rs1.25-1.3bn, reflected in high 60% ECL coverage on Stage-3 loans.

Company expects growth pick-up and NPL reductions to continue through FY25-27

Management has guided for Rs32bn disbursements and 9% loan growth for FY24. Board has approved a 3-year roadmap for the co. which entails loan growth of 12% in FY25, 14% in FY26 and 17% in FY27 on conservative basis. Growth is expected to be higher if sector/policy tailwinds arise from Govt’s housing scheme. The growth expectations bake in 1) manifestation of the growth-enabling structural changes, 2) attention with regards to quality of incremental loans, 3) distribution and Sales team augmentation and 4) sacrifice of some Spread/NIM for retaining good customers.

Repco expects GNPL reduction to continue at current pace of around Rs1bn pa, without technical write-off and ARC Sale. The GNPL level is estimated to reach 2% by FY27, also aided by a material pick-up in loan growth. Stage-2 bucket has been coming down (currently at ~Rs15bn, 12% of loans) with augmentation of field collection staff. Stage-2 loans are expected to decline to near 10% by this March and converge with industry over next 2-3 years. NPLs are negligible in the portfolio disbursed since Jan’22, and Stage-2 is also moderate at 4%. Credit cost could remain negligible for a long period of time as incremental provision releases from envisaged NPL reductions are likely to be written back.

Maintain BUY with 12m PT of Rs550 

Tangible results are visible of the transformative changes implemented by the MD & CEO Mr. Swaminathan. Repco is firmly on track to deliver a well-measured growth acceleration, further reduction in NPLs, improvement in overdue buckets, and a stable & reasonably healthy profitability. We expect 12% loan CAGR, 14-15% PAT CAGR and avg. 2.8%/14% RoA/RoE delivery over FY23-26. Repco’s valuation is still undemanding at 6.5x P/E and 0.8x P/ABV on FY26 estimates. A key future monitorable would be disbursement uptick; when growth accelerates materially then valuation would get a lift.

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