buy - repco home · with a buy and rs 775tp of /sh, based on 3.2x fy19e abv. huge opportunities: at...
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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 vishal.rampuria@hdfcsec.com +91-22-6171-7325
Darpin Shah darpin.shah@hdfcsec.com +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
REPCO HOME FINANCE : INITIATING COVERAGE
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
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research
-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
REPCO HOME FINANCE : INITIATING COVERAGE
Product Mix For Repco Home Share Of LAP Has Increased to ~21%
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research
Repco Home Is A Mid-sized Player Amongst HFCs Mortgage Loans As A % Of GDP Is Low
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research
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
REPCO HOME FINANCE : INITIATING COVERAGE
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
REPCO HOME FINANCE : INITIATING COVERAGE
…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
REPCO HOME FINANCE : INITIATING COVERAGE
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
REPCO HOME FINANCE : INITIATING COVERAGE
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
REPCO HOME FINANCE : INITIATING COVERAGE
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
REPCO HOME FINANCE : INITIATING COVERAGE
.
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
REPCO HOME FINANCE : INITIATING COVERAGE
Comparison with mid-size HFCsRepco Home Is A Mid-Sized Player Avg. Ticket Size for Repco Is Lower Than Peers
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research
Product Mix Comparison Self Employed Mix For Repco Is Highest Across HFCs
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research
23%
43%40%
60%
0%
10%
20%
30%
40%
50%
60%
70%
Can Fin DHFL GRUH Repco
127
783
125 87
0
100
200
300
400
500
600
700
800
Can Fin DHFL GRUH Repco
Rs bn
1.8
1.38
0.87
1.3
0.00.20.40.60.81.01.21.41.61.82.0
Can Fin DHFL GRUH Repco
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%
Can Fin DHFL GRUH Repco
Home Loan Non-Home Loan
Page | 11
REPCO HOME FINANCE : INITIATING COVERAGE
Repco Has Highest NIMs But Gross NPAs Highest Among Peers
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research
Strong ROA Due To Better Yield ROE Comparison
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research
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%
Can Fin DHFL GRUH Repco
0.24%
0.95%
0.54%
2.7%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Can Fin DHFL GRUH Repco
1.9%
1.5%
2.0%
2.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Can Fin DHFL GRUH Repco
21.6%
18.3%
30.0%
18.1%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Can Fin DHFL GRUH Repco
Repco’s GNPA is high but write off very negligible GRUH has highest ROE due to much higher leverage and strong ROA
Page | 12
REPCO HOME FINANCE : INITIATING COVERAGE
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
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research
-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
REPCO HOME FINANCE : INITIATING COVERAGE
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
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research
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
REPCO HOME FINANCE : INITIATING COVERAGE
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
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research
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
REPCO HOME FINANCE : INITIATING COVERAGE
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
REPCO HOME FINANCE : INITIATING COVERAGE
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
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research
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
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
FY12
FY13
FY14
FY15
FY16
FY17
E
FY18
E
FY19
E
Rs bn YoY (%) - RHS
-
0.5
1.0
1.5
2.0
2.5
3.0
-
5.0
10.0
15.0
20.0
25.0
FY13
FY14
FY15
FY16
FY17
E
FY18
E
FY19
E
RoAE RoAA (RHS)%
Page | 17
REPCO HOME FINANCE : INITIATING COVERAGE
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
Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research
Repco is a compounding play for next few years
0
200
400
600
800
1,000
1,200
Feb-
14A
pr-1
4Ju
n-14
Aug
-14
Oct
-14
Dec
-14
Feb-
15A
pr-1
5Ju
n-15
Aug
-15
Oct
-15
Dec
-15
Feb-
16A
pr-1
6Ju
n-16
Aug
-16
Oct
-16
Dec
-16
Feb-
17
2.0x
3.0x
4.0x
5.0x
0
200
400
600
800
1,000
1,200
Apr
-13
Jun-
13A
ug-1
3O
ct-1
3D
ec-1
3Fe
b-14
Apr
-14
Jun-
14A
ug-1
4O
ct-1
4D
ec-1
4Fe
b-15
Apr
-15
Jun-
15A
ug-1
5O
ct-1
5D
ec-1
5Fe
b-16
Apr
-16
Jun-
16A
ug-1
6O
ct-1
6D
ec-1
6Fe
b-17
15x
20x
25x
30x
Page | 18
REPCO HOME FINANCE : INITIATING COVERAGE
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
REPCO HOME FINANCE : INITIATING COVERAGE
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
Page | 20
REPCO HOME FINANCE : INITIATING COVERAGE
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
REPCO HOME FINANCE : INITIATING COVERAGE
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
400
500
600
700
800
900
Mar
-16
Apr
-16
May
-16
Jun-
16
Jul-1
6
Aug
-16
Sep-
16
Oct
-16
Nov
-16
Dec
-16
Jan-
17
Feb-
17
Mar
-17
Repco TP
Page | 22
REPCO HOME FINANCE : INITIATING COVERAGE
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. 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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
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