Repco Home Finance reported Q1FY18 PAT of Rs 452m, 6% below our estimate, driven by sluggish loan growth, a drop in yields and poor asset quality performance. Sanctions and disbursements were down 9% y-o-y. Due to some confusion on the High Court order lifting the ban on property registration in March, disbursements were muted. Management alluded to a slow July, with disbursements of Rs 1.8 bn. However, a High Court clarification has been issued recently, due to which disbursements should pick up, going forward.
With intense competition, especially in the Rs 0.5 m+ ticket-size segment, for home loan and LAP, the repayment rate touched a record high of 24.6%, driving muted loan growth of 1% q-o-q/13% y-o-y. Both yields and cost of funds were down 70bp y-o-y, resulting in stable spreads of 2.9%. However, the sequential yield fall of 57bp is higher than the usual 20-30bp decline witnessed in Q1.
Asset quality worsened, with the GNPL ratio increasing 137bp q-o-q and 175bp y-o-y to 4%. Management mentioned that there are 17-18 accounts in high ticket-size LAP that are NPL, amounting to Rs 350-370m.
Valuation and view: REPCO recorded loan book CAGR of 26% over the past five years, with equally impressive earnings growth of 24%. 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, including external ones like the High Court ban on property registration and demonetisation, and internal ones like asset quality woes in high-ticket LAP. We cut our FY18/19e EPS by 4%/8% to factor in lower growth and margins. Buy with a target price of Rs 800.