Repco Home Finance Ltd Research Report By IIFL

Repco Home Finance Ltd.: Safe as Home – BUY
CMP Rs650, Target Rs783, Upside 20.5%

A premium franchise

Repco Home Finance Ltd. (RHFL) is a niche, fast growing and highly profitable housing finance company in India. Loan book has witnessed robust 30% CAGR over the past three years and currently stands at Rs. 6,850cr. The uniqueness of the franchise comes from its extensive focus on the self-employed customer segment, presence in under-penetrated Tier 2 & 3 markets (deep foothold in South India), optimized portfolio mix with LAP at 20% and an efficient sourcing and operating model. A well-crafted business set-up provides a reasonably strong immunity to RHFL from increasing competition.

Impressive growth and profitability to sustain

Given a low base, we believe that RHFL can continue to grow at 25-30% pa for many years to come supported by a measured branch expansion. Even if property prices were to correct meaningfully, the consequent acceleration in volume growth should support the growth trajectory. Being more resilient to competition, it is likely that RHFL would be able to hold spread comfortably above 3% amid moderating cost of funds. The latter would largely be a function of a) substitution of bank borrowings by bonds/CPs and b) decline in cost of bank funding with accelerated Base Rate reductions. The ongoing process of diversifying funding base has already driven a one notch credit rating upgrade to AA. RHFL’s asset quality is expected to remain rock-solid with NPL levels remaining largely stable. A robust credit appraisal process and conservative lending practice will continue to stand in good stead.

Valuation will stay elevated and justifiably so

Inherent RoA band for RHFL will remain at 2-2.4% translating to 22-23% sustainable RoEs at optimal leverage, which is one of the best in industry. While company’s valuation may appear full at 3.2x FY18 P/ABV, we believe there is some headspace for re-rating. However, the return for a prospective investor would largely come from sustained brisk book value growth. Initiate coverage on RHFL with a BUY rating and 12-month price target of Rs. 783.

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