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Another strong quarter of profitability          

Growth and margins in-line, asset quality improved meaningfully    

Repco Home Finance yet again delivered a strong RoA/RoE of 3.3%/16% in Q2 FY25 aided by asset quality improvement, higher other income, and resilient spread/margin. Loan disbursements at Rs8.67bn were up 27.5% qoq/8.5% yoy, but the increase in portfolio run-off (BT Out) restrained loan book expansion to 1.9% qoq/8.1% yoy. Portfolio spread witnessed only a marginal decline to 3.34% with 15-20 increase in CoF, which was driven by repricing of bank loans, further decline in share of NHB borrowings and higher incremental cost of bank loans. Portfolio Yield improved by 10 bps qoq, aided by residual benefit from the 20 bps MLR hike taken during April-May and loan book mix shift further towards Home Equity (250+ bps rate differential over HL).  

Asset quality improved with absolute 5-7% qoq reduction in GNPL & Stage-2 loans with their level improving to 3.96% & 11% from 4.25% & 11.7% as of June. Technical write-offs were likely ~Rs140mn and contributed 45% of the GNPL decline. Credit cost was Rs160mn positive in the quarter, underpinned by estimated Rs90-100mn & Rs4050mn provision releases due to the core reduction in GNPLs & Stage-2 loans. ECL coverage on GNPLs was stable at 61% (much higher than LGDs). Opex was higher (up 14% qoq) on account of higher depreciation and higher non-employee expenses (increased sourcing from DSAs/Connectors). Other Income was higher at Rs127mn on account of ~Rs70mn recovery from the written-off accounts and ~Rs30mn dividend income from the associate company.

Disbursements to accelerate, asset quality to further improve and spread to marginally decline in H2 FY25    

Management remains confident about achieving its annual disbursement target of Rs36-37bn (ask of Rs20-21bn in H2) driven by 1) augmentation of distribution points (Branch + SO), 2) addition of Sales team at branches, 3) strengthening of non-branch sourcing channels (DSAs & Connectors), 4) emphasis on improving productivity of Branch Heads, Sales, DSTs and DSAs/Connectors and 5) competitive pricing for select profiles in Salaried HL. Increased BT Out (rise in takeovers by PSU Banks) could likely be a hurdle in organically achieving the guidance of Rs150bn loan portfolio by March. However, the co. has been open to small portfolio acquisitions through DA.  Portfolio Spread should not decline materially in H2 FY25 due to 1) 10 bps MLR hike taken from November 2) ongoing product mix shift towards HE and 3) calibrated increase in CoF (co. being able to negotiate finer spreads on MCLR loans). Stage-2 loans and GNPLs are expected to significantly improve in the second half owing to augmented collection efforts/manpower in early buckets and relentless focus on NPL recoveries. Company is on track to achieve its Stage-2 target of 10% and GNPL target of 3% by March. Credit Cost should be positive for the rest of the year.  

Growth uptick required for significant incremental valuation re-rating  

Key future monitorables would be a) the delta in disbursement uptick after joining of CBO in March and augmentation of Sales team with experienced people and b) reduction in OD buckets along with continuing NPL recoveries. Repco trades at 0.8x P/BV and 6.3x P/E on FY26 estimates. While valuation is undemanding/attractive for the current RoA/RoE delivery, a significant incremental re-rating (P/BV to go past 11.2x) is contingent on visibility improving for 12-14% loan growth in the medium term. We maintain BUY and have marginally increased 12m PT to Rs615.    

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