Repco Home Finance - Growth Prospects Looks Bright, Valuation Stands At Comfortable Level: HDFC Securities

HDFC Securities Retail Research

Repco Home Finance Ltd. took various steps to recover in FY23, such as simplification of underwriting process, decentralisation of powers, improving employee morale, bringing in a target-oriented culture in terms of sanctions, disbursements, asset quality, etc.

Though first quarters are generally weak for the company’s business, it has still displayed healthy YoY performance. Its loan book has increased by 6% YoY, while disbursements are up 7% YoY. In terms of profitability, its net interest income grew by 17% YoY, while profit after tax grew by 44% YoY. Its low current valuation provides a buffer for investors.

We have envisaged a 12% compound annual growth rate in its loan book over FY23-25E, while the NII and net profit are expected to grow at a CAGR of 9% and 10% respectively over the same period.

Repco Home Finance is expected to report an return on asset of 2.4% by the end of FY25.

We believe that investors can buy the shares of Repco Home Finance between Rs 398-407 (0.9 timesFY25E adjusted book value) and add more on dips to Rs. 353-361 (0.8 times FY25E ABV) for the base case fair value of Rs 447 (one time FY25E ABV) and for the bull case fair value of Rs 491 (1.1 times FY25E ABV) over the next two-three quarters.

Risks and concerns

Rules and regulatory policies

Any unfavorable change in rules and regulatory policies can have a negative impact on earnings outlook of the company.

Regional concentration

The company has modest scale of operations with a high regional concentration. Majority of the branches are located in South India with five South Indian states constituting around 84% of loan book as of Q1 FY24. Tamil Nadu accounted being the major contributor with 57% exposure.

The company has been trying to expand the presence beyond South and has opened branches in West Bengal, Orissa, Maharashtra, Gujarat, Madhya Pradesh and Rajasthan. However, even after the geographic diversification efforts, it still is exposed to concentration risk.

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