Repco Home Finance Ltd. share price target

REPCOs 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 managements guidance of sanctions of 24 May 2018 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.

Loan growth set to improve: After 4 consecutive quarters of decline in sanctions and disbursements post-demonetisation, the same grew at a robust pace of 70.3% YoY and 30.9%, respectively (although on a lower base). Loan book grew 9.6% to 9,490 crore as on 31 Dec'17 with 81.1% contribution from Individual Home Loans. This is expected to improve further in Q4 with disbursements aimed at ~ 1,000 crore. Also, the management has guided a growth of ~20% in FY19E. Overall growth in Tamil Nadu and Kerala is low currently, however the same is expected to improve going ahead. Further, RHFL plans to expand more in other...

Q3 was weak with PAT at Rs 485 mn (up 4.6% YoY) below our estimate (of Rs 587 mn). This was due to muted advances growth, margin compression and higher provisions on deterioration in asset quality.

We maintain BUY with a TP of Rs 750 (2.8x Dec-19E ABV of Rs 269). Repcos 3QFY18 net earnings were below expectation due to higher credit cost as GNPA increased 50bps QoQ to 3.7%. As expected, Loan book growth was muted at 1.8/9.6% QoQ/YoY as the home states land regularisation rules along with sand mining problems impacted construction. NIM continued to be strong at 4.6%.

Background: Repco Home Finance Limited (RHFL) is a low to medium ticket size home loan financing company predominately based in tier II / III cities of southern India. Promoted by the State-owned Repco Bank Ltd in 2000, RHFL presently has 129 branches and 31 satellite centers of which ~87% are located in the southern market. Repco has shown robust growth in its loan book clocking 26% CAGR (FY13-FY17) and stood at INR ~94bn at the end 3QFY18. RHFL average loan per unit is at INR...

REPCO reported a tepid 4% YoY increase in 3QFY18 PAT to INR485m (15% miss). Sluggish loan growth, a sharp uptick in opex and a modest sequential increase in the GNPL ratio were key highlights of the quarter. While 3Q is a seasonally weak quarter in terms of disbursements, we had expected a sequential pick-up due to the low base in 2Q. However, while sanctions were sequentially stable at INR7.7b, disbursements declined 13% QoQ to INR6.6b. Management attributed this to the lack of demand for self-construction due to unavailability of sand in Tamil Nadu. However, recently, the Supreme Court lifted the sand mining ban in TN via an interim order. Consequently, loan growth was sequentially similar at 9.6% (v/s 10% in 2QFY18), resulting in a loan book of INR94.9b. We expect loan growth of ~10% in FY18, which should increase to ~14% in FY19 and further thereafter.

Repco Home Finance (Repco) reported 3QFY18 earnings of INR 485mn, up 5% YoY. Loan growth moderated to 9.6% on account of i) Sand Mining ban in TN after Madras High Court's order in Nov'17; ii) sluggish LAP growth (flat YoY) with company focusing on lower ticket LAP iii) higher repayments due to increase in competition and iv) slower growth outside TN in Kerala, Karnataka and AP due to state specific issues. Recently, Supreme Court has issued an interim stay on this order. Therefore, if the sand mining ban is revoked; this would help in reviving growth. Other highlights: i) There was marginal pressure on asset quality as GNPL ratio increased 10% QoQ while Net NPL increased 7% QoQ. GNPL ratio increased...

Outlook: REPCO has to some extent recovered from the earlier shocks. It ran into troubles on account of certain uncontrollable challenges like madras high court stay order on registration of certain category of properties, significant increase in sand prices in its key markets of tamilnadu and impact of GST and demonetization on its non-salaried segment. We expect challenges mentioned to be transitionary in nature. Its capabilities in non-salaried segment, rural markets, lower ticket size makes it a unique play. As a result the company is able to clock margins higher than peers which gets reflected in relatively better return ratio....

Loan growth to improve going ahead: Post-demonetization, the loan sanctions and disbursements have consistently de-grown resulting in slower loan growth. In Q2FY18, while sanctions and disbursements continued to de-grow, the same increased at a robust pace, on QoQ basis, by 23.4% and 37.2%, respectively. Over the next few years, the management expects loan growth of +25% ex-Tamil Nadu (may take time to pick up pace considering slower business recovery postdemonetisation). The company plans to maintain its LAP book close to 19% of total book. Over FY17-19E, on the back of expected business recovery and government's focus on affordable housing segment, we expect loan book to...

We maintain BUY with a TP of Rs 770 (3x Sept-19E ABV of Rs 257). Repcos 2QFY18 net earnings beat our estimates owing to higher yield on advances, resulting in 50bps QoQ improvement in NIM to 4.8%. Disbursements continued to soft owing to registration issues in TN, and declined 14% QoQ to Rs 7.5bn. Loan book growth was up 3.6/10% QoQ/YoY at Rs 93.2bn, as annualised repayment rates was lower at 19% compared to 21.9% in 1QFY18. Asset quality improved 50bps QoQ, with GNPAs at 3.40%. Credit cost was flat QoQ at Rs 116.1mn. PAT increased 23.7/22.3% QoQ/YoY to Rs 559mn.