IGI Logo

Focused efforts drive asset quality improvements

NIM contracts ~20bp QoQ; provision write-backs lead to earnings beat

* REPCO’s 4QFY24 PAT grew 32% YoY to INR1.1b (8% beat), while FY24 PAT rose ~33% YoY to INR3.95b. NII increased ~11% YoY to ~INR1.6b (in line). Other income was up ~31% YoY at INR141m.

* PPOP grew ~7% YoY but declined ~6% QoQ to INR1.3b (6% miss). REPCO took net provision write-backs of ~INR100m, aided by healthy improvement in asset quality and recoveries of ~INR1b in 4QFY24.

* GNPA improved ~60bp QoQ to 4.1% and NNPA improved ~40bp to ~1.5%. The company increased the PCR on S3 loans by ~5pp QoQ to ~65%. ECL/EAD declined to ~3.8% (~4% in 3Q).

* REPCO has consistently maintained healthy asset quality over the past few quarters, with disbursements showing signs of gaining momentum. However, loan growth remains elusive, with ~9% YoY growth. Home loans grew ~2% YoY, while other mortgage loans (including top-ups, CRE, and LAP) rose ~33% YoY.

* The valuation at 0.8x FY26E P/BV is indeed attractive, but we will continue to monitor the company’s ability to: 1) scale up loan growth in core home loans without any significant impact on NIM, and 2) further improve asset quality.

* We raise our FY25/FY26 EPS estimates by 6%/3% to factor in provision write-backs in FY25 and benign credit costs in FY26. We model a CAGR of ~12%/8% in loans/PAT over FY24-FY26E. With RoA/RoE of 2.8%/13% in FY26E, we reiterate our Neutral rating on the stock with our revised TP of INR540 (based on 0.9x FY26E BVPS).

* While several process improvements, organizational changes and technology transformations have been implemented, the team is yet to instill confidence in achieving a healthier home loan growth. This would serve as the primary catalyst for the stock.

Trajectory improving but loan growth remains muted

* 4QFY24 disbursements rose 7% YoY to INR8.9b. The run-offs increased, with repayment rates rising ~2pp YoY to ~17% (~15% in 4QFY23).

* The proportion of non-salaried customers remained broadly stable at ~51%, while the proportion of non-mortgage loans rose to ~25% in 4Q.

* The management shared that it plans to add 40 branches/centers in FY25 and strengthen its resources in sales, collection and underwriting verticals to further aid loan growth. We estimate loan growth of 11%/12% in FY25/FY26. Spreads contract sequentially, driven by lower yields

* Reported yields declined ~20bp to ~11.7% and reported CoF dipped ~10bp to ~8.3%, leading to spreads declining ~10bp QoQ to ~3.3%. Reported NIM contracted ~20bp QoQ to 5.1%.

* The management shared that it is prepared for some spread/margin compression when it prices home loans aggressively in order to target salaried customers. We model NIMs of 5.1%/5.0% for FY25/FY26, primarily driven by compression in yields over the next two years.

Key highlights from the management commentary

* Guided for AUM of ~INR150b by FY25 and ~INR200b by FY27. It also guided for GNPA to decline to <3% by FY25 and to <2% by FY27.

* REPCO has initiated an IT transformation project and has already invested ~INR220m in FY24. Expects additional spending of ~INR150-180m in FY25.

Valuation and view

* While asset quality continues to improve, we will continue to focus on the management’s ability to deliver on the guided metrics of asset quality and loan growth. We expect credit costs to moderate and estimate provision write-backs in FY25.

* We believe that REPCO would want to use some levers on its NIM for stronger loan growth in FY25-FY26. Although the risk-reward appears favorable at the current valuation of ~0.8x FY26E P/BV, we would wait for additional evidence of successful execution in home loan growth before adopting a positive stance on the stock. We reiterate our Neutral rating with a TP of INR540 (based on 0.9x FY26E BVPS).

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412