buy - repco home · with a buy and rs 775tp of /sh, based on 3.2x fy19e abv. huge opportunities: at...

INITIATING COVERAGE 15 MAR 2017

Repco Home Finance BUY

Great, and finally affordableRepco Home Finance is a niche player in the small-ticket housing finance market (median Rs 0.8 mn). It focusses on underserved markets, especially the self-employed in Tier II and III cities. Factors like low mortgage penetration, government’s impetus for ‘Housing for All’ and incentives for affordable housing bode well for Repco.

We expect the loan book to rise at 20% CAGR over FY16-19E. Repco enjoys low cost of funds due to its AA rating and is well capitalised (~20%). Spreads of 3% will continue with negligible exposure to the commoditised salaried class. Strong credit appraisal, and a deep understanding of client segments and geographies is a key edge.

NPAs have shot up post demonetisation, led by slippages in the big ticket LAP book. Management is confident of recovery, as slipped LAP loans have LTVs under 50%. Sales focus in LAP is now on lower ticket sizes only. We have built high credit costs (50-60bps for FY17/18E) and see RoA/RoE at 2.26/19.3% in FY19E. The stock has corrected by ~20%, providing an attractive entry point. Initiate with a BUY and TP of Rs 775/sh, based on 3.2x FY19E ABV.

Huge opportunities: At 9%, India’s mortgage penetration is low, with Tier II and III cities witnessing even lower levels this offers Repco huge growth opportunities, especially in the affordable housing segment.

Niche segment: Repco largely provides home loans (79%) and non-housing loans (21%) in low ticket sizes. Competition is low, especially in the self-employed segment, due to income assessment-related challenges. This segment offers spreads which are 150bps higher than those of the salaried class.

High soft delinquency: 30 days+ overdues hover at ~12%. They rose to 14.7% in 1HFY17, due to defaults in the above-Rs 0.5 mn loans bracket, especially LAP. However, write-offs at 0.05% of total disbursements since inception have been negligible, and highlight strong appraisal, underwriting and recovery capabilities. NPAs rose sequentially from 2.4 to 4.2% due to demonetisation, and are expected to normalise to 1.7% by FY19. Inability to resolve asset quality issues remains a key risk.

Concentrated presence: Repco’s loan book is mainly in TN, which contributes 62% to the business.

FINANCIAL SUMMARY (Rs mn) FY16 FY17E FY18E FY19E Net Interest Income 3,039 3,589 4,206 5,091 PPOP 2,693 3,203 3,731 4,520 PAT 1,501 1,660 2,020 2,737 EPS (Rs) 24.0 26.5 32.3 43.8 ROAA (%) 2.17 1.97 2.02 2.26 ROAE (%) 17.0 16.1 16.9 19.3 Adj. BVPS (Rs) 146.8 157.2 198.2 241.3 P/ABV (x) 4.32 4.03 3.20 2.63 P/E (x) 26.4 23.9 19.6 14.5 Source: Bank, HDFC sec Inst Research

INDUSTRY HFCs CMP (as on 14 Mar 2017) Rs 634 Target Price Rs 775 Nifty 9,087

Sensex 29,443

KEY STOCK DATA

Bloomberg REPCO IN

No. of Shares (mn) 63

MCap (Rs bn) / ($ mn) 40/603

6m avg traded value (Rs mn) 110

STOCK PERFORMANCE (%)

52 Week high / low Rs 900/487

3M 6M 12M

Absolute (%) 18.0 (23.6) 8.6

Relative (%) 7.7 (27.5) (10.5)

SHAREHOLDING PATTERN (%)

Promoters 37.13

FIs & Local MFs 23.47

FIIs 24.53

Public & Others 14.87

Source : BSE

Vishal Rampuria [email protected] +91-22-6171-7325

Darpin Shah [email protected] +91-22-6171-7328

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

REPCO HOME FINANCE : INITIATING COVERAGE

Niche focus Repco is a niche player in the small ticket size housing

loan segment (median Rs 0.8 mn), focussing on Tier II and III cities, and peripheries of Tier I cities, largely in South India. It has an impeccable record of a loan book growth of 30% CAGR over the last 5 years, with stable asset quality and strong return ratios.

Repco focusses on the non-salaried segment which offers better yield on advances, owing to challenges in the underwriting process for this class of borrowers. This requires diligent processes, which Repco has built over the last decade. Currently, the salaried/non-salaried segments contribute 40/60% respectively to its loan book.

In the mortgage business, the share of housing finance companies has increased as compared to banks, due to a focussed approach and better customer service. However, in FY16, competition from banks has been higher, leading to them

increasing their market share as they shifted focus to retail book due to a weak corporate capex cycle.

Tier II and III cities have lesser competition as compared to Tier I markets. PSU banks have a strong presence here, but poor customer service.

The average ticket size is smaller in such cities, with more play on volumes. For eg, the average ticket size for Repco/LICH/HDFC is Rs1.3/1.8/2.2mn respectively

With mortgage loans at around 9% of GDP, the home loan market in India is underpenetrated. Increasing per capita income and nuclearisation of families have led to the mortgage market expanding at a CAGR of 18% over the last 5 years. Going forward, the outlook continues to be robust.

The Government is targeting ‘Housing for All’ by FY22. This would provide further impetus to demand for mortgage loans.

Repco Home is a strong player in the small ticket size loans, with a focus on smaller cities Self-employed category remains a key focus, with a contribution of 60% to the business mix

Page | 2


Loan Growth To Taper On A High Base Disbursement Growth Has Been Lumpy

Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research

Business Is Concentrated In Southern Market Share Of Non-Salaried Has Increased


-5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

E

FY18

E

FY19

E

Rs bn YoY (%) - RHS

(10.0)

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

E

FY18

E

FY19

E

Rs bn YoY (%) - RHS Loan book growth in the current year is expected to be low due to economic challenges such as demonetisation, registration issues in TN and focus on resolving asset quality issues Despite expansion to other regions, Southern India’s domination to continue The salaried class typical consists of individuals who work in the private sector and may not include corporate employees

46.6

46.0

45.5

45.0

44.7

44.3

44.1

43.2

42.9

42.5

42.2

41.2

40.9

40.3

40.0

53.4

54.0

54.5

55.0

55.3

55.7

55.9

56.8

57.1

57.5

57.8

58.8

59.1

59.7

60.0

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

1QFY

17

2QFY

17

3QFY

17

Salaried Non Salaried%

Tamil Nadu 62%

Karnataka 12%

Andhra Pradesh

7%

Telangana 4%

Kerela 4%

Maharastra 6%

Others 2%

Guj 2%

Page | 3


Product Mix For Repco Home Share Of LAP Has Increased to ~21%


Repco Home Is A Mid-sized Player Amongst HFCs Mortgage Loans As A % Of GDP Is Low


A majority of loans is used for self construction Share of LAP has increased over a period of time, which fetches higher spreads Mortgage loans have been growing at a CAGR of 18% over the last 5 years, and the outlook is equally strong

Self-Construction

45%

Outright Purchase

28%

LAP 20%

Plot 5%

Others 2%

84.7

83.7

82.5

81.3

80.8

80.5

80.7

80.8

81.0

80.8

81.0

80.2

79.9

79.3

79.4

15.3

16.3

17.5

18.7

19.2

19.5

19.3

19.2

19.0

19.2

19.0

19.8

20.1

20.7

20.6

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

1QFY

17

2QFY

17

3QFY

17

Individual Loans LAP%

9%

18% 20%

32%36%

40%

62%

0%

10%

20%

30%

40%

50%

60%

70%

Indi

a

Chin

a

Thai

land

Mal

ayas

ia

Sout

h Ko

rea

Taiw

an

USA

Mortgage Loan as a % of GDP

127

783

125 87

0

100

200

300

400

500

600

700

800

Can Fin DHFL GRUH Repco

Rs bn

Page | 4


Untapped opportunities… As per the NSSO Census 2011, 42% of the total

workforce in urban India is self employed. However, most of the top HFCs and banks are focussed on big ticket size home loans (above Rs 2 mn) for both the salaried class and professionals.

Also, ticket size disbursement analysis clearly reveals the focus on higher ticket deals by a majority of financers. However, players like Repco focus on lower

ticket size loans and the self-employed category. Given under penetration levels, these segments offers strong growth prospects over the medium to long term.

Also, the penetration of housing loans within the self-employed category is significantly lower as compared to that of the salaried class.

Majority Of Workforce Is Self Employed < Rs 1 mn Ticket Size Loan Is 13% Of Disbursements

(%) Self

Employed Regular wage/

Salaried Casual Labour

Rural 55.9 8.7 35.4 Urban 41.9 43.3 14.8 Total 52.2 17.9 29.9

Source : NSSO Census 2011, HDFC sec Inst Research

Disbursement (HFC & PSBs) Rs Bn

FY14 % of total

FY15 % of total

<1 mn 308 15% 309 13% >1 to<2.5 mn 776 38% 863 37% >2.5 mn 945 47% 1,168 50% Total 2,028 100% 2,340 100%

Source : NHB, HDFC sec Inst Research

Self employed, especially non professionals, have a huge unmet demand Low ticket size is not the focus for the bigger HFCs and banks

Page | 5


…but higher default rates Despite the opportunities that come with it, small

ticket size loans are exposed to greater risks, thereafter higher gross NPAs. The under-Rs 1 mn home loan category of PSU banks has gross NPAs of 2.6% against 0.6-0.9% for higher ticket sizes. The reason for this is the low income level of the borrowers, the lack of margin safety and unplanned expenditure like personal emergencies.

Slab Wise O/s Loans Of PSU Banks And Gross NPA

Ticket Size Slab (Rs mn)

Outstanding Loans Rs bn

Gross NPA (%)

FY14 FY15 FY14 FY15 <1 1,147 1,157 2.62 2.58 >1 to<2.5 1,457 1,720 0.9 0.9 >2.5 1,147 1,533 0.6 0.6 Source: NHB report 2015

Repco Too Has Higher Gross NPAs

Source: Company, HDFC sec Inst Research

GNPA on 2-year lagged basis is higher at 2.2% Most banks and HFCs have found it difficult to maintain asset quality in the lower ticket size bracket

1.4 1.5 1.5

1.3 1.3

2.7 2.5 2.42.2 2.2

-

0.5

1.0

1.5

2.0

2.5

3.0

FY12

FY13

FY14

FY15

FY16

GNPA % GNPA %-2 yr lagged

Page | 6


Strong underwriting & collection Repco has a lending history of more than 15 years.

Over a period of time, it has developed a strong underwriting, collection and recovery system. The company largely focusses on the self-employed category (60% of the loan book), especially individuals who may not have reported their income fully.

Credit extended to the self-employed segment is largely based on ’assessed income’ (as income proof is absent or inadequate), and thus the inherent risks associated with it are higher. The incentive structure is well aligned, with collections being an important parameter for Sales, Credit and Branch managers.

The above, therefore, results in higher delinquencies, especially in softer buckets. Over the last 2-3 years, the 30-days past overdues have been around 12%.

However, these increased to 14.7% in 1HFY17 due to higher defaults in the above-Rs 5 mn loan segment.

Within the loan book, 10% of home loans and 40% of non-home loans, especially LAPs, are in the above-Rs 5mn ticket size. Nevertheless, the reported gross NPA (90+ days past overdue) figure is 2.4%, which shows the ability to recover before they become NPAs. Further, the cumulative write-offs have been negligible at 0.05% of total disbursements.

The recent demonetisation move has also increased stress, with gross NPAs going up to 4.2% in 3QFY17. (With RBI dispensation, it stands at 2.65%)

Management remains optimistic of resolving this, as LTV of the stressed loans is moderate (home loan at 65% and LAP at 45%.)

Product-wise NPA Trend Borrower-wise NPA

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Typically, it takes the sales and credit officers 3-4 days by to assess the income of the customers in the self-employed group Though delinquencies are higher, the collections happen with a lag Repco is facing challenges in the last 2-3 quarters in the higher ticket size loans, especially LAPs. Resolution is expected, as loans are backed by a moderate loan-to-value ratio. RBI dispensation allowed extra 90days for recognition of NPA for loan under Rs 10 mn turning bad between 1st Nov to 31st Dec-16

1.7

1.1 1.3

0.7 1.

2

1.3

2.4 2.

9

2.3 3.

1

1.8

2.9 3.1

5.5

2.2

1.8 2.

3

1.3

2.2 2.4

4.2

-

1.0

2.0

3.0

4.0

5.0

6.0

1QFY

16

2QFY

16

3QFY

16

4QFY

16

1QFY

17

2QFY

17

3QFY

17

Salaried NPA % Non salaried NPA % Total (%)

With RBI dispensation 1.3

3.6

2.7

%

2.0

1.7 2.0

1.2 1.

9

2.0

3.7

3.3

2.4

3.7

2.0

3.7

3.7

6.2

2.2

1.8 2.

3

1.3

2.2 2.4

4.2

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1QFY

16

2QFY

16

3QFY

16

4QFY

16

1QFY

17

2QFY

17

3QFY

17

Home Loans NPA % LAP NPA % Total GNPA (%)

%With RBI dispensation 2.

24.

32.

7

Page | 7


Creditably Low Write-offs

Source: Company, HDFC sec Inst Research

0.000%

0.010%

0.020%

0.030%

0.040%

0.050%

0.060%

0.070%

0.080%

-

2.0

4.0

6.0

8.0

10.0

12.0

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

E

FY18

E

FY19

E

Write Off (Rs mn) % of Total AUM - RHS Negligible write-offs highlight deep understanding of Repco’s core segment

Page | 8


Advantage affordable housing Huge housing shortage: According to a KPMG report,

India currently has a shortage of ~60 mn housing units. The requirement is expected to rise to 111 mn units by FY22. Urban housing is expected to account for about 85 to 90% of the total as people migrate to urban areas. Affordable urban housing is expected to form ~70% of the total requirement for urban housing. Further, of the total requirement of 111 mn units, nine states (Uttar Pradesh, Bihar, Maharashtra, West Bengal, Madhya Pradesh, Andhra Pradesh – incl Telangana, Rajasthan, Tamil Nadu, and Karnataka) will be contributing ~ 70%.

Housing Shortage Particulars (mn units) Urban Rural Total Current housing shortage 19 40 59 Required housing by 2022 26-29 23-25 49-54 Total need 44-48 63-65 107-113 Source: KPMG, HDFC sec Inst Research

Govt’s focus on affordable housing: Apart from the huge requirement for housing, the Government too has taken initiatives (on the demand as well as supply side) to provide a fillip to the affordable housing sector. To fuel the demand, the government has

taken the following steps - (1) Credit-linked subsidy - interest rebates, (2) Subsidy for individual construction. On the supply side, the government has provided impetus by (1) In situ –providing land for slum redevelopment, (2) Public private partnership for affordable housing projects and 3) incentives for construction of affordable housing.

• Pradhan Mantri Awas Yojana (PMAY) – The ‘Housing for All (Urban)’ mission for urban areas is being implemented for the period 2015-2022. This mission intends to provide central assistance for providing housing for all eligible families/ beneficiaries who don’t own a pucca house. The Government has an ambitious target of building 20 mn homes in India, with loan disbursements of Rs 1.3 tn over the next three years.

• The net present value (NPV) of the interest subsidy will be credited to the loan account of the borrower.

• So far, only Rs 3.8 bn subsidy has been disbursed. With the scheme for MIG in place and supply boost, the scheme is expected to further boost demand.

Subsidy Under PMAY Category Income level Size of the House Remarks EWS Household income < Rs 0.3 mn Up to 30 sq.m Interest subsidy of 6.5 % for a tenure of 20 years or

during tenure of loan whichever is lower for loan up to Rs 0.6 mn. LIG

Household income of Rs 0.3 to Rs 0.6 mn

Up to 60 sq.m

MIG I Household income of Rs 0.6 to Rs 0.12 mn

Up to 90 sq.m Interest subsidy of 4% for a tenure of 20 years or during tenure of loan whichever is lower for loan up to Rs 0.9 mn.

MIG II Household income of Rs 1.2 to Rs 1.8 mn

Up to 110 sq.m Interest subsidy of 3% for a tenure of 20 years or during tenure of loan whichever is lower for loan up to Rs 1.2 mn.

Source: NHB

Affordable push has been facing supply-related challenges, which received some remedial measures in the recent Central Budget

Page | 9


.

Changes in Central Budget 2017 also support the affordable segment

• Allocation of PMAY increased from Rs 170bn to Rs 230 bn

• Refinancing target for NHB increased 15% to Rs 200 bn

• Infrastructure status for affordable housing and service tax waiver

• ‘Unit size’ definition for EWS and LIG changed to carpet area to increase unit size for the end-users

Central govt has given strong fillip to the affordable housing segment with slew of changes

Page | 10


Comparison with mid-size HFCsRepco Home Is A Mid-Sized Player Avg. Ticket Size for Repco Is Lower Than Peers


Product Mix Comparison Self Employed Mix For Repco Is Highest Across HFCs


23%

43%40%

60%

0%

10%

20%

30%

40%

50%

60%

70%


127

783

125 87

0

100

200

300

400

500

600

700

800


Rs bn

1.8

1.38

0.87

1.3

0.00.20.40.60.81.01.21.41.61.82.0


Rs mn

Self employed is key focus for Repco Non Housing loan (LAP) has become integral part of the HFC business model

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Home Loan Non-Home Loan

Page | 11


Repco Has Highest NIMs But Gross NPAs Highest Among Peers


Strong ROA Due To Better Yield ROE Comparison


3.5%

3.1%

4.1% 4.2%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%


0.24%

0.95%

0.54%

2.7%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%


1.9%

1.5%

2.0%

2.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%


21.6%

18.3%

30.0%

18.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%


Repco’s GNPA is high but write off very negligible GRUH has highest ROE due to much higher leverage and strong ROA

Page | 12


Strong loan book growth; spreads to sustain Affordable push from the Govt. is expected to lead to

a strong loan book growth of 20%. We expect Repco’s yield to be marginally lower, as the benefits of lower cost of borrowings are passed on. We expect spreads

of ~2.9% and NIM of ~4.2% to sustain over FY16-FY19. Loan book mix between home and non-home loans is expected to be maintained at current levels of 79% and 21% respectively.

Loan Book Growth To Improve In FY18 NIM To Be Maintained


-5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

E

FY18

E

FY19

E

Rs bn YoY (%) - RHS

We expect higher loan book growth in FY19, as benefits of the Govt’s push towards affordable housing takes off

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

E

FY18

E

FY19

E

YoA CoF Spreads NIM

%

Page | 13


Competitive cost of funds

Repco enjoys strong credit rating of AA (From ICRA), and support from its parent company Repco Bank, which is owned by the Government. The company is largely dependent on bank borrowings (62%) and NHB refinancing (18%) for its capital requirements. Strong performance and a vibrant bond market have helped it to increase the share of the whole debt market to 14%. The same is expected to increase to 20% over the next 3-4 years. Also, falling bank

borrowing rates and higher contributions from other sources are expected to lower blended borrowing costs for the company.

Recently, RBI relaxed the sectoral cap on debt mutual fund exposure to HFCs from 10% to 15%. This would further increase the fund pool available to HFCs, and lead to lower costs of borrowing.

Repco’s Borrowing Cost To Decline Banks Dominate Funding Sources


Repco’s borrowing cost from banks is largely at their respective base rates RBI’s relaxation on sectoral cap for HFCs is expected to increase fund availability for the sector by ~Rs 500bn.

Banks62.7%

NHB16.7%

Repco Bank6.6%

NCDs10.6%

CPs3.4%

9.4 9.5 9.3 9.6 9.4 9.2 9.0 8.7

-

2.0

4.0

6.0

8.0

10.0

12.0

FY12

FY13

FY14

FY15

FY16

FY17

E

FY18

E

FY19

E

%

Page | 14


Niche lending leads to higher opex

Repco’s cost-to-income (C/I) ratio is high at 19.3%, compared to other HFCs, given the small ticket size business and considerable effort required to assess income levels in the self-employed space.

However, the company sources more than 60% of loans through ‘loan melas’ and referrals, which keeps

the commission payout lower and helps manage costs. The company has diversified to many states in the last few years, resulting in an increase in the C/I ratio. With a higher loan book growth in those states, the C/I ratio is expected to trend lower. We expect it to settle at 18.8% by FY19.

Cost-To-Income To Be Marginally Lower Employee Costs High For Repco


Employee cost forms 64% of the operation cost Loan melas and referrals help in sourcing loans and controlling cost

-

0.2

0.4

0.6

0.8

1.0

1.2

-

5.0

10.0

15.0

20.0

25.0

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

E

FY18

E

FY19

E

C-I Ratio C-AA Ratio (RHS)%

0%

5%

10%

15%

20%

25%

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Employees Cost Administrative & Other Expenses Depreciation

% of Total Income

Page | 15


Asset quality to improve Repco has an impeccable record of maintaining the

quality of its assets. Year-end gross NPAs have been in the range of 1-1.5%, due to high exposure to small-ticket-sized loans and the self-employed category. However, cumulative write-offs have been only 0.06% of disbursements, which demonstrates the company’s underwriting and recovery system.

The recent increase in GNPAs was driven by higher delinquencies in the above-Rs 5 mn loan ticket size bucket, especially LAPs. In 3QFY17, without RBI dispensation, gross NPAs went up to 4.2% due to

demonetisation, as borrowers suffered losses in their business. Management remains confident to bring it down to 1.5%-2% over the next few quarters, as these loans have a moderate Loan-to-Value (LTV) figure. However, we build in slower recovery, with gross NPA figures at 2.7/2.1/1.8% in FY17/18/19E respectively.

We expect high credit costs for FY17 and FY18, and PCR to increase to 79%.

For FY19, we expect normalization and credit cost of 20bps.

GNPA Has Increased In The Last 3 Quarters Asset Quality Deterioration To Reverse Soon

Source : Company, HDFC sec Inst Research (Without dispensation) Source : Company, HDFC sec Inst Research

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

1QFY

17

2QFY

17

3QFY

17

GNPA (%)

1.3 1.3

2.7

2.1

1.8

0.5 0.5

1.3

0.5 0.2

-

0.5

1.0

1.5

2.0

2.5

3.0

FY15

FY16

FY17

E

FY18

E

FY19

E

GNPA % NNPA %

Stress is concentrated in the LAP book. Management remains confident of resolving stress as these loans have moderate loan to value ratio.

Page | 16


Strong PAT growth; ROE at 19.3% With higher loan book growth and resolution in asset

quality stress, we expect PAT to increase at a CAGR of 22% over FY16-19. ROA is expected to be 2.3%, and

higher leverage would lead to ROE improving to 19.3%.

Trend In PAT ROE To Improve


Comfortable capital position

Repco has a strong capital base. Its CAR of 20% (Tier 1 at 7% and Tier II at 3%), is way above the regulatory requirement of 12%. It currently has a leverage of ~7x, and has headroom to increase this to 9-10x over the next 3 years. Given its focus on small ticket size loans, the average risk weight for the company is 57%.

Risk Weight On Housing Loan For HFC Risk Weights Loan value cap Rs mn LTV cap

35% 30 80%

50% 30-75 90%

75% >75 75%

Higher leverage will increase ROE Well capitalized for growth

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Valuation and view We expect the company to be a major beneficiary of

affordable housing opportunities, along with under-penetrated demand of the self-employed category. The stock has corrected 20% from its peak, due to asset quality-related challenges, and is quoting at 2.6x FY19 P/ABV multiple. This provides a good entry point.

We believe the stock should trade at 3.2x FY19E ABV. We initiate coverage with a BUY rating and TP of Rs 775/sh.

1 yr Forward P/BV 1 yr Forward P/E


Repco is a compounding play for next few years

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Key risks As much as 60% of Repco’s loan book is exposed to

the self employed. Though we expect the company to contain its NPAs and credit costs, any inability to contain defaults is a key risk.

With 90% of the loan book in South India, Repco has a high concentration risk.

Any adverse changes in the HFC regulations are key monitorables, and remain a risk.

Inability to address current asset quality issue is a key risk.

High NPA level remain key area of concern

PEER VALUATION

NBFC/HFC MCap

(Rs bn) CMP (Rs)

Rating TP

(Rs) ABV (Rs) P/E (x) P/ABV (x) RoAE (%) RoAA (%)

FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E

LICHF 285 565 NEU 524 205 238 278 14.5 14.0 11.9 2.76 2.38 2.03 19.8 17.7 18.1 1.42 1.32 1.39 SHTF 217 957 BUY 1,434 457 499 562 15.7 13.3 11.7 2.09 1.92 1.70 12.8 13.6 13.9 1.92 2.01 1.97 MMFS 158 280 BUY 333 84 94 113 37.0 22.1 15.6 3.22 2.90 2.40 6.6 10.4 13.4 0.98 1.42 1.73 CIFC 143 918 BUY 1,294 227 276 341 20.6 15.8 12.7 4.05 3.33 2.69 17.6 19.6 20.5 2.33 2.59 2.64 SCUF 132 2,007 BUY 2,648 703 763 854 20.0 17.2 13.5 2.85 2.63 2.35 13.5 14.0 15.5 2.89 2.82 2.99 CAFL 63 685 BUY 781 194 217 217 25.9 19.6 19.6 3.53 3.16 3.16 13.4 15.6 15.6 1.50 1.65 1.65 Repco 40 634 BUY 775 157 198 241 23.9 19.6 14.5 4.03 3.20 2.63 16.1 16.9 19.3 1.97 2.02 2.26 Source : HDFC sec Inst Research

Page | 19


INCOME STATEMENT (Rs mn) FY15 FY16 FY17E FY18E FY19E Interest Earned 6,691 8,521 10,136 11,755 13,905 Interest Expended 4,318 5,483 6,547 7,549 8,815 Net Interest Income 2,373 3,039 3,589 4,206 5,091 Other Income 239 297 332 394 476 Total Income 2,613 3,336 3,921 4,600 5,567 Total Operating Exp 547 643 718 869 1,046 Employee Expense 335 409 461 556 672 PPOP 2,065 2,693 3,203 3,731 4,520 Provisions & Contingencies 203 392 658 635 325 PBT 1,862 2,301 2,545 3,096 4,195 Provision for Tax 631 800 885 1,077 1,459 PAT 1,231 1,501 1,660 2,020 2,737 Source: Company, HDFC sec Inst Research

BALANCE SHEET (Rs mn) FY15 FY16 FY17E FY18E FY19E SOURCES OF FUNDS

Share capital 624 625 625 625 625 Reserves and surplus 7,498 8,923 10,422 12,255 14,783 Shareholders' funds 8,121 9,548 11,047 12,880 15,409 Total Borrowings 51,044 65,379 76,969 91,192 111,476 Other Liabilities, provisions 1,592 2,305 2,792 4,773 6,106 Total 60,757 77,232 90,809 108,845 132,991 APPLICATION OF FUNDS

Advances 60,221 77,049 90,552 107,920 131,924 Investments 124 124 136 150 165 Fixed assets 89 93 95 98 101 Other Assets 323 366 586 677 800 Total 60,757 77,632 91,370 108,845 132,991 Source: Company, HDFC sec Inst Research

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KEY RATIOS

FY15 FY16 FY17E FY18E FY19E

VALUATION RATIOS

EPS 19.7 24.0 26.5 32.3 43.8 Earnings Growth (%) 11.8 21.9 10.6 21.7 35.5 BVPS 130.2 152.7 176.6 206.0 246.4 Adj. BVPS (100% cover) 125.5 146.8 157.2 198.2 241.3 ROAA (%) 2.28 2.17 1.97 2.02 2.26 ROAE (%) 15.8 17.0 16.1 16.9 19.3 P/E (x) 32.1 26.4 23.9 19.6 14.5 P/ABV (x) 5.05 4.32 4.03 3.20 2.63 P/PPOP (x) 19.1 14.7 12.4 10.6 8.8 Dividend Yield (%) 0.24 0.28 0.35 0.40 0.45 PROFITABILITY

Yield on AUM (%) 12.52 12.42 12.10 11.85 11.60 Cost of Funds (%) 9.59 9.42 9.20 8.98 8.70 Core Spread (%) 2.93 3.00 2.90 2.87 2.90 NIM (%) 4.44 4.43 4.28 4.24 4.25 OPERATING EFFICIENCY

Cost/Avg. Asset Ratio (%) 1.0 0.9 0.9 0.9 0.9 Cost-Income Ratio (Excl Treasury) 21.0 19.3 18.3 18.9 18.8 BALANCE SHEET STRUCTURE RATIOS

AUM Growth (%) 29.0 27.9 17.5 19.2 22.2 Borrowings Growth (%) 30.8 28.1 17.7 18.5 22.2 Equity/Assets (%) 13.4 12.4 12.2 11.8 11.6 Equity/Loans (%) 13.5 12.4 12.2 11.9 11.7 Total Capital Adequacy Ratio (CAR)

20.3 19.1 18.6 18.1 17.4

FY15 FY16 FY17E FY18E FY19E

ASSET QUALITY

Gross NPLs (Rs mn) 791 1,009 2,445 2,266 2,309 Net NPLs (Rs mn) 298 368 1,214 487 317 Gross NPLs (%) 1.3 1.3 2.7 2.1 1.8 Net NPLs (%) 0.5 0.5 1.3 0.5 0.2 Coverage Ratio (%) 62.4 63.5 50.3 78.5 86.3 Provision/Avg. Loans (%) 0.4 0.6 0.8 0.6 0.3 ROAA TREE

Net Interest Income 4.44% 4.43% 4.28% 4.24% 4.25% Non Interest Income 0.44% 0.43% 0.39% 0.39% 0.39% Operating Cost 1.01% 0.93% 0.85% 0.87% 0.87% Provisions 0.26% 0.43% 0.72% 0.57% 0.19% Tax 1.17% 1.16% 1.05% 1.08% 1.21% ROAA 2.28% 2.17% 1.97% 2.02% 2.26% Leverage (x) 7.0 7.8 8.2 8.3 8.5 ROAE 15.8% 17.0 % 16.1% 16.9% 19.3% Source: Company, HDFC sec Inst Research

Page | 21


RECOMMENDATION HISTORY

Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period

SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 15-Mar-17 634 BUY 775

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Disclosure: We, Vishal rampuria, CA, & Darpin Shah, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock – No Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HDFC Securities Ltd or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HDFC Securities Ltd . Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HDFC Securities Ltd may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HDFC Securities and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HDFC Securities Ltd, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HDFC Securities Ltd and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report. HDFC Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HDFC Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HDFC Securities or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HDFC Securities nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HDFC Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC Securities Ltd. is a SEBI Registered Research Analyst having registration no. INH000002475 HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel, Mumbai - 400 013 Board : +91-22-6171 7330 www.hdfcsec.com Page | 23

buy - repco home · with a buy and rs 775tp of /sh, based on 3.2x fy19e abv. huge opportunities: at...

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