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On-track for further improvement in Growth & Asset Quality

We hosted the Management of Repco Home Finance for Investor Meetings. The company 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 14-15% loan CAGR, 15-16% PAT CAGR and avg. 2.8%/14% RoA/RoE delivery over FY23-26. Notwithstanding the strong price performance in the past seven months, Repco’s valuation is still undemanding at 6.1x P/E and 0.9x P/ABV on FY25 estimates. Reiterate BUY with 12m PT of Rs550.

Tangible results of transformative changes; loan growth is picking up

In his 19-month tenor as MD & CEO, Mr. Swaminathan has significantly improved Repco’s functioning by tactfully addressing a) Branch Productivity/Sales, b) DSA/DST engagements, c) Salary/Incentive/Commissions structures, d) Balance Transfers (both IN & OUT), e) Processes & Systems for Approvals and Underwriting, f) Mechanisms for early bucket Collections & NPL Recoveries and g) Tech upgradation (new LOS/LMS). The concomitant outcomes are 1) pick-up in portfolio growth with consistent improvement in Disbursement volume and positive net BT activity, 2) substantial reduction in GNPLs and 3) material improvement in RoE with adept margin management as well.

Management expects growth trends to keep improving in the coming quarters and targets 10-12% growth in the current fiscal and 15-20% growth in ensuing years. The drivers of stronger growth in the future would be a) better productivity from recently deployed Sales team in branches, d) planned augmentation of the Sales team and branch coverage (all branches/locations to be covered), c) utilization of current higher margin/spread to competitively price and even tap adjacent customer/market segments, and d) further improvement in asset quality and controlled fwd. flows spurring growth sentiment. It is pertinent to note that Repco has higher repayment rate than peers (which impacts the net portfolio accretion) due to a long period (FY17-22) of weak disbursements and low portfolio growth.

Buckets & NPLs will continue to improve; Credit cost to remain negligible

Asset quality improvement is expected to continue with Management confident even about reducing the OD buckets/Stage-2 substantially over the next couple of years. In the current fiscal, the Stage-2 assets have been coming down by around Rs0.8-1bn per quarter and this pace is expected to largely sustain on the back of a dedicated collection team focused on correcting early bucket delinquencies and sensitizing/educating vintage customers (moulding behaviour). These efforts are also manifested in low slippages (ann. 80 bps) in recent quarters. Better quality of customer onboarding (750+ avg. CIBIL score), improved underwriting/filtration and augmentation of collection efforts is translating into much lesser delinquency creation from disbursements of past 20-22 months (1+ dpd <5% for originations since Jan’22). Stress has already crystallized from the legacy portfolio which was restructured during Covid. While NPL addition is likely to remain modest, NPL resolution (led by recoveries) is expected to remain strong. Management expects to surpass its GNPL reduction target of Rs1bn for the year. The Stage-3 is targeted at <4% by Mar’24 and <3% by Mar’25. The reduction in NNPL level would continue to be much faster as bulk of the provision releases are retained for enhancing coverage and for addressing future business-asusual slippages. The envisaged NPL reduction would mean negligible credit cost for many quarters to come. As per management, there are no outright fraud cases within the current NPL stock and hence the principal recoverability is high.

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