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Strong performance continues

Repco delivered 5-6% NII/PPOP and 10% PAT beat on our expectations. While disbursements/loan growth was in-line, the significant performance beat was driven by material margin expansion and substantial improvement in asset quality that drove negligible credit cost. RoA/RoE stood at 3.1%/16%, a multi-quarter high.

Shifting of growth gear from H2 FY24 would be key monitorable

Disbursements stood at Rs8bn (v/s est. Rs8.3bn), marking an acceleration in business activity from Q1 FY24. AUM grew by 2.1% qoq/7.1% yoy, as portfolio reduction was higher than the preceding quarter at annualized 17% (15% in Q1) mainly on account of much higher NPL resolution/recovery. There was no increase in BT Out and it continues to be modest at <Rs.0.5bn.

Asset quality performance continues to exceed expectations

Repco delivered a substantial reduction of Rs0.58bn in GNPLs during Q2 FY24 versus average reduction of Rs300mn in previous three quarters. Slippages were marginal at Rs230mn (0.7% annualized), and the flows from std. restructured book (Rs5.7bn) moderated. Taking a prudent stance, the management has not been writing back provisions released from NPL recoveries and retaining them for enhancing PCR on remaining NPLs. As a result, the Stage-3 ECL coverage improved significantly from 51% to 57%. Management shared in the Earnings Call that Stage-2 has also witnessed some decline. Hence, overall credit cost in the quarter was negligible at Rs16mn.

Management expects NPL recovery to be higher than initially anticipated Rs1bn in the current year and estimates Stage-2 assets to decline to 10% by March’24. Repco has built a collection team of 80-100 people for containing fwd. flows and slippages. Quality of new originations has been strong with 750+ avg. CIBIL score.

Managed margins well through the cycle

NIM improved by 30 bps qoq, against expectation of 10 bps decline, standing at multiyear high of 5.4%. Portfolio spread expanded by 10 bps qoq to 3.4% notwithstanding a 20 bps rise in CoF. Improvement in Portfolio Yield was sharp at 30 bps qoq, aided by re-pricing of loans portfolio. Repco intends to maintain spread around 3.5%. Blended incr. lending rate is 11.5% comprising of 10% for HL and 13-14% for all non-Housing products (LAP, CRE-R & CRE-C), and incr. CoF is at 8.6%. With the significant reduction in NPLs, Repco is now eligible for NHB refinance and has applied for it.

Earning upgrades continue; valuation to re-rate further on growth uptick

Our earnings/ABV estimates of FY24/25 undergo 4-5%/3-4% upgrades on raising of loan spread and moderation of credit cost assumptions. We expect 14% loan CAGR, 15-16% PAT CAGR and avg. 2.8%/13.5% RoA/RoE delivery over FY23-26. Under the leadership of Mr. Swaminathan, the company has delivered consistent gradual improvement in growth and meaningful improvement in asset quality. With the operational manifestation of all the structural growth enabling changes done by the management, the loan growth is expected to improve at a faster clip from H2 FY24. Notwithstanding the strong price performance in recent months, Repco’s valuation is still undemanding at 6.5x P/E and 0.9x P/ABV on FY25 estimates. We retain BUY with substantially raised 12m PT of Rs550.

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