Repco Home Finance: Business franchise is currently undervalued: ICICI Securities

Repco Home Finance
BUY Maintained

Lower credit cost leads to earnings beat; margins shrink as growth gathers momentum

Repco Home Finance (Repco) reported PAT of Rs621mn in Q1FY23, ahead of our expectations, due to lower credit cost at Rs237mn (80bps) vs our estimate of >Rs500mn. GNPAs, after remaining flat at 7.0% in Q4FY22, moderated to 6.4% as recoveries of Rs1.4bn more than offset slippages of Rs850mn. Company increased coverage on stage-3 assets to 37% (vs 32%/30% in Q4/Q3FY22) and created Rs200mn of contingency provisions during Q1FY23. Being offset by release of provisioning on stage-2 assets, credit cost was contained at 80bps. Disbursement rate picked pace and was up 7% QoQ. This, coupled with a lower repayment/prepayment run-rate, has arrested sequential decline in the loan portfolio Q1FY23 onwards. Yields contracted 60bps QoQ due to conscious efforts of repricing loans lower to curtail balance transfer as well as waiving processing fees in a few cases. This dragged NIM and NII growth below expectations.

Under the leadership of new MD & CEO, Mr. K. Swaminathan, growth strategy seems to be delivering the right results. Company’s business franchise is currently undervalued – the stock trades below its FY23E book and at 3.4x FY23E earnings, and is available at <0.1x AUM. Maintain BUY with an unchanged target price of Rs470, assigning 1.1x Sep’23E book value. Key risk: behaviour of the restructured portfolio. - Stage-3 assets moderated QoQ by 60bps to 6.4%; restructured pool to move out of moratorium Q2FY23 onwards; created contingency buffer towards the same: Post revised asset classification norms, GNPAs, after remaining flat at 7.0% in Q4, witnessed moderation to 6.4% as recoveries of Rs1.4bn had more than offset slippages of Rs850mn. Repco has increased coverage on stage-3 assets to 37% (vs 32%/30% in Q4/Q3FY22) through incremental net provisions of Rs200mn. This was offset by reversal of provision of Rs170mn against stage-2 pool. Outside of cumulative ECL provisions of Rs4.75bn, it has created Rs200mn of contingency provisions during Q1FY23. Therefore, impact of provisioning on overall earnings was Rs237mn translating into credit cost of 80bps. Home loans’ GNPA moderated 40bps QoQ to 5.9% while LAP GNPA improved significantly by 130bps QoQ to 8.5%. On customer profile, salaried segment GNPA witnessed 20bps QoQ improvement to 3.5% while non-salaried GNPA declined 70bps QoQ to 9.3%. Restructured pool remained at ~Rs7bn and contingency provision of Rs200mn was created for this restructured pool. The pool will move out of the principal moratorium Q2FY23 onwards and there is a likelihood of slippages from this restructured pool, which will result in relatively higher stage-3 assets QoQ in Q2FY23. Overall, it is now carrying cumulative provisions of 4.0% (vs 4.0%/3.5% in Q4/Q3FY22) on total assets. We expect stage-3 pool to be ~7.1% in FY23E and then descend further to 6.3% in FY24E. We are building-in credit cost of 0.7% / 0.6% for FY23E / FY24E respectively.