Below estimates; Performance marred by state specific issues; Cut EPS by 4-8%
* Repco Home Finance (REPCO) reported 1QFY18 PAT of INR452m, 6% below our estimate, driven by sluggish loan growth, a drop in yields and poor asset quality performance.
* Sanctions and disbursements were down 9% YoY. Due to some confusion on the High Court order lifting the ban on property registration in March, disbursements were muted. Management alluded to a slow July, with disbursements of INR1.8b. However, a High Court clarification has been issued recently, due to which disbursements should pick up, going forward.
* With intense competition, especially in the INR0.5m+ ticket-size segment, for home loan and LAP, the repayment rate touched a record high of 24.6%, driving muted loan growth of 1% QoQ/13% YoY.
* Both yields and cost of funds were down 70bp YoY, resulting in stable spreads of 2.9%. However, the sequential yield fall of 57bp is higher than the usual 20- 30bp decline witnessed in 1Q. The share of bank borrowings declined from 63% to 60% sequentially, while that of NCDs increased 500bp QoQ to 15%.
* Asset quality worsened, with the GNPL ratio increasing 137bp QoQ and 175bp YoY to 4%. Management mentioned that there are 17-18 accounts in highticket- size LAP that are NPL, amounting to INR350-370m.
* Valuation and view: REPCO recorded loan book CAGR of 26% over the past five years, with equally impressive earnings growth of 24%. Presence in the underserved markets, reasonable pricing power on asset side, declining cost of funds and expanding reach should support its earnings over the longer term. However, in the recent past, the company has been plagued with several issues, including external ones like the High Court ban on property registration and lingering impact of demonetization, and internal ones like asset quality woes in high-ticket LAP. We cut our FY18/19E EPS by 4%/8% to factor in lower growth and margins. Buy with a target price of INR800 (3.2x FY19 P/B).
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