Repco Home Finance Research Reports By HDFC Sec & Motilal Oswal

Research Report by HDFC Sec

Brighter days ahead

REPCO’s 4Q numbers beat estimates given the claw back in asset quality (GNPAs dipped ~20% QoQ). Though overall growth (+10% YoY) was sluggish, it was largely owing to (deliberately) tepid growth in LAP (up merely 2%). Credit costs dipped (60bps ann. vs. 83bps in 3Q) as REPCO wrote back provisions of Rs 28mn. NIMs too improved 20bps QoQ to 4.8% as yields remained flat and COF dipped 30bps.

Though asset quality healing (a typical 4Q phenomenon) lagged in comparison with previous years, the stock of GNPAs under SARFAESI (~60%) and robust recoveries in 4Q provide visibility on future improvement. The shying away from big ticket LAP loans and restricting LAP share to below 20% add to our comfort.

With business headwinds receding and expansion into newer geographies (will add 15-20 new branches), rebound in growth (CAGR of ~18% over FY18-20E) is a given. We like REPCO for its steady (if slow) healing, 2%+ RoAAs and the sizable addressable opportunity. Maintain BUY with a TP of Rs 683 (2.5x Mar-20 ABV of Rs 273).

Highlights of the quarter

 Asset quality improved (4Q phenomenon), as GNPAs dipped ~20% QoQ to ~Rs 2.8bn (2.87%, -83bps) while NNPAs dipped ~35% QoQ to ~Rs 1.25bn (1.29%, -76bps QoQ). This was broad based as HL/LAP GNPAs dipped ~80/100bps to 2.4/4.9%. With implementation of SARFAESI (on ~60% of GNPAs) and voluntary one-time settlements, we expect asset quality to improve hereon. We have factored in GNPAs of 2.8/2.3% for FY19/20E.

 Loans grew ~10/4% YoY/QoQ to ~Rs 98.6bn primarily driven by (~12/4% YoY/QoQ) in home loans. Consequently, the share improved 160bps YoY to ~81.4% of loans. LAP growth was restricted to ~2% YoY/QoQ given the asset quality woes in this segment. With the cleanup in asset quality, the management is focussed on growth here on. We have conservatively factored in a loan CAGR of 18% over FY19-20E which provides some upside risk

 Near-term outlook: The stock should do well given the improvement in asset quality.

Research Report by Motilal Oswal

Core TN market tepid; improvement in asset quality

 REPCO’s 4QFY18 PAT increased 10% YoY to INR566m (in-line). Modest loan growth, a tapering cost-to-income ratio and a sequential decrease in the GNPL ratio were the key highlights of the quarter.

 Sanctions increased 19% QoQ to INR9.2b, while disbursements rose 29% QoQ to INR8.5b. This was modestly below management’s guidance of sanctions of INR10b in 4QFY18. Management indicated that the core market of Tamil Nadu (TN) still faces lingering effects of the sand mining ban, as TN loan book growth was a tepid 6% YoY.

 Consequently, loan growth was at 10.3% YoY (v/s 9.6% in 3QFY18), resulting in a loan book of INR98.6b. LAP book has remained steady at INR17-18b for the past seven quarters.

 Calculated spreads increased 25bp QoQ to 3.4%, driven by stable yields and a 25bp reduction in CoF. We believe cost of funds has bottomed out and this should have an impact on spreads, going forward.

 The mix of CPs in the borrowing mix continues to increase (9.8% in 4QFY18 v/s 7% in 3QFY18 and 4.6% YoY in 4QFY17).

 Opex increased 7% YoY to INR138m (4% beat), leading to a 140bp QoQ decline in the cost-to-income ratio to 17.5%.

 GNPA ratio decreased 87bp QoQ to 2.9%, driven by an 80bp QoQ reduction in the home loans GNPA ratio and a 100bp reduction in LAP GNPLs. However, we estimate INR150m write-off in the quarter.

 Valuation view: REPCO recorded a loan book CAGR of 26% and earnings CAGR of 24% over the past five years. Presence in the underserved markets, reasonable pricing power on the asset side and expanding reach should support its earnings over the longer term.

However, in the recent past, the company has been plagued with several issues, predominantly on the growth front. We believe that these issues should get resolved over the next few quarters. We cut our FY19E/20E EPS by 3%/4% to factor in lower growth. Buy with a target price of INR710 (2.5x FY20E BVPS).