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Loan growth muted; asset quality improves

Earnings in line; NIM stable QoQ

* Repco Home Finance (REPCO)’s 2QFY25 PAT grew 15% YoY to INR1.1b (in line). The company’s 1HFY25 PAT grew ~16% YoY to ~INR2.2b, and we expect 2HFY25 PAT to increase ~7% YoY.

* The NII declined ~2% YoY to ~INR1.7b (in line). REPCO reported a healthy growth in its other income, primarily led by improvements in insurance commissions, investment income, and recoveries from written-off accounts. Opex rose ~21% YoY to INR517m (~10% above MOFSLe) due to higher depreciation, which would normalize from next quarter onwards.

* Provision write-backs for 2Q stood at ~INR160m, translating into annualized credit costs of -45bp (PY: ~5bp and PQ: ~4bp). GNPA declined ~30bp QoQ to ~4%, while NNPA dipped ~5bp QoQ to ~1.7%. The company reduced the PCR on S3 loans by ~1pp QoQ to ~61%.

* Home loans grew ~5% YoY, while other mortgage loans (including top-ups, CRE, and LAP) rose ~19% YoY. Management guided for disbursements of ~INR36-38b in FY25 and for its loan book to grow to ~INR148b by Mar’25.

* Valuations at ~0.8x FY26E P/BV are indeed attractive, but we believe that the company will continue to under-deliver on its loan growth guidance because of: 1) its inability to scale-up loan growth in core home loans, and 2) too high focus on improving asset quality and profitability, which is detrimental to loan growth.

* We cut our FY26/FY27 estimates by ~5% each to factor in lower loan growth and normalization in credit costs. We model a loan/PAT CAGR of ~10%/8% over FY24-FY27E. For an RoA/RoE of 2.8%/12.4% in FY27E, we reiterate our Neutral rating on the stock with our revised TP of INR500 (based on 0.8x Sep’26E BVPS).

Loan growth remains subdued; repayment rates higher

* Disbursements in 2QFY25 rose ~9% YoY to INR8.7b. Loan book grew ~8% YoY to ~INR140b. BT-OUTs were elevated, with repayment rates increasing ~85bp YoY to ~17.6% (PY: ~16.8%).

* The proportion of non-salaried customers remained broadly stable at ~52%. The proportion of non-mortgage loans was stable at ~26%.

* Management shared that it plans to scale up its branches to ~250 by Mar’25. (compared to 227 branches as of Sep’24). The company will strengthen its resources in the sales function, which will further boost loan growth. The company has started recruiting experienced employees in the sales function and it will look to add ~20-30 employees in 2HFY25. The company is also adding multiple sourcing channels, including connectors and corporate DSAs. We estimate a loan growth of 9%/10% in FY25/FY26.

Reported spreads and NIMs stable QoQ

* Reported yields rose ~10bp QoQ to ~12.1%, and reported CoF also increased ~20bp to ~8.8%, leading to stable spreads of ~3.4%.

* Management shared that it has increased its Marginal Lending Rate (MLR) by ~10bp from Nov’24 and has cumulatively increased its MLR by ~20bp in YTDFY25. Reported NIM was stable QoQ at 5.1%.

* The cost-to-income ratio (CIR) rose ~275bp QoQ to ~27.4% primarily because of higher depreciation expense in the quarter.

* Management shared that in a declining interest rate environment, it will assure customers that lower interest rates will be passed on to them within three months of any cut in interest rates. We model NIMs of 5.0%/4.9% for FY25/FY26 (vs. 5.2% in FY24), primarily due to a moderation in its yields because of higher competitive intensity.

Key highlights from the management commentary

* Of the total disbursements of >INR75b over the last 2-3 years under the leadership of the current management team, the company’s GNPA is ~INR500m (<1% of the disbursements).

* Disbursements in 3Q of the fiscal year have historically declined sequentially because of festivals and floods. However, the company expects disbursements to be sequentially better in 3QFY25.

* Management shared that the company plans to do a mega auction of repossessed properties in Dec'24. Management also guided that it expects the credit costs to remain benign in FY25, aided by stronger recoveries in 2HFY25.

Valuation and view

* We will continue to focus on the management’s ability to deliver on the guided metrics of asset quality and loan growth. Like last fiscal year, we expect credit costs to remain benign and model net provision write-backs in FY25.

* We believe that REPCO should utilize the levers on its NIM for stronger loan growth in FY26-FY27. Although the risk-reward balance appears favorable at the current valuation of ~0.8x FY26E P/BV, we believe that the company will have to start delivering stronger loan growth in its core Home Loans product to command higher valuations. We reiterate our Neutral rating with a TP of INR500 (based on 0.8x Sep’26E BVPS).

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