Strong operating performance; GNPL declines sequentially
* Repco Home Finance (REPCO) reported 2QFY18 PAT of INR559m (+22% YoY), driven by an improvement in margins and contained opex growth.
* Disbursements picked up after three slow quarters post demonetization. At INR7.5b this quarter, it is just 15% below the levels of 2QFY17 (before demonetization). This drove sequential loan growth of 3.6%, the highest since demonetization. With a pick-up in disbursements, coupled with a favorable base, we expect loan growth for FY18 to be in mid-teens.
* Repayment rate in the quarter was 20.4%, in line with the past trends (excluding 1QFY18). We are encouraged by the fact that the company has been able to keep the repayment rate stable.
* Another key highlight this quarter was the strong yield on loans, which increased 40bp sequentially to 11.9% due to NPL recoveries and re-pricing in LAP portfolio. As a result, spreads/margin were up 50bp YoY to 3.4%/4.8%.
* The company witnessed a decline in absolute GNPLs (-INR377m QoQ to INR3.2b) after six quarters. GNPL ratio declined from 4% to 3.4% sequentially, driven by a 120bp fall in LAP NPLs to 5.2%.
* The company tweaked its provisioning policy, resulting in INR194m lower provisions made during the quarter. This boosted PAT by INR127m. Going by the old provisioning policy, PCR would have been 50% and PAT would have declined 5% YoY to INR432m.
* Valuation view: REPCO recorded loan book CAGR of 26% and earnings CAGR of 24% over the past five years. 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 predominantly on the growth front. We believe these issues should get resolved over the next few quarters. We increase our FY18/19E EPS by 7%/9% to factor in better margins and lower opex. Buy with a target price of INR800 (2.8x Sept-19 book).
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