Buy This Small Cap NBFC Stock For Aggressive 164% Potential Gains: ICICI Securities

ICICI Securities bets on the Repco Home Finance Limited stocks. The brokerage suggests buy the stocks for a target price of Rs 470 apiece. If we consider both, the brokerage's estimated target price and the Current market price of the stock, investors who buy the stock at the current market price could witness potential gains of 164% in 12 months. Repco Home Finance reported a PAT of Rs 621mn in Q1FY23. ICICI Securities in the report stated that lower credit cost leads to earnings beat; margins shrink as growth gathers momentum. Repco Home Finance is a small-cap NBFC having a market capitalization of Rs 1,116 crore.

Stock Outlook & Returns

The stocks of the company today closed at Rs 178.45 apiece, after gaining 14.22%. Currently, it is trading Rs 65.63 above its 52-week low level of Rs 113.35 apiece and Rs 170.72 apiece below its 52-week high level of Rs 349.70 apiece.

The stocks of the company in the past 1 week have moved up by14.1%. Over the past 1 and 3 months, the stocks gained 17.79% and 17.79%, respectively. In the past 1, 3 and 5 years, the stocks have given a negative return of 42.96%, 42.77% and 74.4%, respectively. The return over the period of 5 years shows that the stock performed well in short term compared to long-term investments.

 

Stage-3 assets moderated QoQ by 60bps to 6.4%; restructured pool to move out of moratorium Q2FY23 onwards; created contingency buffer towards the same

Post revised asset classification norms, GNPAs, after remaining flat at 7.0% in Q4, witnessed moderation to 6.4% as recoveries of Rs1.4bn had more than offset slippages of Rs850mn. Repco Home Finance has increased coverage on stage-3 assets to 37% (vs 32%/30% in Q4/Q3FY22) through incremental net provisions of Rs200mn. This was offset by reversal of provision of Rs170mn against stage-2 pool. Outside of cumulative ECL provisions of Rs 4.75bn, it has created Rs200mn of contingency provisions during Q1FY23. Therefore, impact of provisioning on overall earnings was Rs237mn translating into credit cost of 80bps.

Home loans' GNPA moderated 40bps QoQ to 5.9% while LAP GNPA improved significantly by 130bps QoQ to 8.5%. On customer profile, salaried segment GNPA witnessed 20bps QoQ improvement to 3.5% while non-salaried GNPA declined 70bps QoQ to 9.3%. Restructured pool remained at ~Rs7bn and contingency provision of Rs200mn was created for this restructured pool. The pool will move out of the principal moratorium Q2FY23 onwards and there is a likelihood of slippages from this restructured pool, which will result in relatively higher stage-3 assets QoQ in Q2FY23. Overall, it is now carrying cumulative provisions of 4.0% (vs 4.0%/3.5% in Q4/Q3FY22) on total assets. "We expect stage-3 pool to be ~7.1% in FY23E and then descend further to 6.3% in FY24E. We are building-in credit cost of 0.7% / 0.6% for FY23E / FY24E respectively," the brokerage said.

Disbursements up 7% QoQ; conscious efforts to curtain BT-out; trend of sequential decline in loanbook arrested during this quarter

As was indicated by the management that pace of disbursements witnessed in Q4FY22 is likely to sustain in Q1FY23 as well, disbursements encouragingly were up 7% QoQ to Rs6.4bn. This, on a lower base, translated to 168% YoY growth. This in turn, coupled with repayment/prepayment run-rate at Rs1.8bn per month (compared to >Rs2bn QoQ), arrested the sequential decline in loan portfolio. Loanbook was up 1% QoQ and down 1% YoY to Rs118.6bn. Company has made intentional efforts to curtail BT (out) by offering competitive rates, reflected in lower yields QoQ. BT out (annualised) run-rate improved to 17-18% of AUM as against 21-22% in Q4FY22. Overall, management is looking at AUM growth of 10% for FY23. We are building-in AUM growth of 5%/10% for FY233/FY24E respectively.

Yields contracted 60bps QoQ thereby dragging NIM and NII growth below expectations

Yield on assets corrected 60bps QoQ to 10.2%, which was due to the following reasons:
i) Rs 24mn due to repricing the loans at lower interest rates to curtail balance transfer.
ii) Rs 30mn-40mn by way of impact of repayment of higher-yielding loans and contracting incremental disbursements at relatively lower yield.
iii) Aalso, penal interest charges were lower QoQ by Rs45mn.
iv) Offers/waiver of processing fee too had an impact of Rs35mn.
v) Recovery from technically written-off accounts was lower by Rs15mn. Going ahead, the company has increased lending rates in two tranches in Jul'22, which will help improve book yields in Q2FY23.

Overall borrowings were lower by 4% QoQ (in absolute terms lower by Rs3.7bn). However, cost of funds was flat QoQ as Repco Home Finance repaid low-cost NHB borrowings. As a result, spreads were lower 60bps QoQ to 3.2% and management has guided for spreads in the range of 3.1-3.2%. Net interest income, down 5% YoY as well as QoQ, settled much below our expectations.

"We are building-in spreads of 3.2% for FY23E and expect it to contract further to 3% in FY24E," the brokerage said.

Buy For A Target Price of Rs 470 apiece

According to the brokerage firm, "Repco Home Finance reported PAT of Rs 621mn in Q1FY23, ahead of our expectations, due to lower credit cost at Rs237mn (80bps) vs our estimate of >Rs500mn. GNPAs, after remaining flat at 7.0% in Q4FY22, moderated to 6.4% as recoveries of Rs1.4bn more than offset slippages of Rs850mn. Company increased coverage on stage-3 assets to 37% (vs 32%/30% in Q4/Q3FY22) and created Rs200mn of contingency provisions during Q1FY23. Being offset by release of provisioning on stage-2 assets, credit cost was contained at 80bps. Disbursement rate picked pace and was up 7% QoQ. This, coupled with a lower repayment/prepayment run-rate, has arrested sequential decline in the loan portfolio Q1FY23 onwards. Yields contracted 60bps QoQ due to conscious efforts of repricing loans lower to curtail balance transfer as well as waiving processing fees in a few cases. This dragged NIM and NII growth below expectations."

The brokerage added, "Under the leadership of new MD & CEO, Mr. K. Swaminathan, growth strategy seems to be delivering the right results. Company's business franchise is currently undervalued - the stock trades below its FY23E book and at 3.4x FY23E earnings, and is available at

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.