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MOSL: REPCO HOME FINANCE (BUY)- Asset quality improves-Margins surprise positively

​Repco Home Finance: Asset quality improves; Margins surprise positively

(REPCO IN, Mkt Cap USD0.7b, CMP INR755, TP INR900, 19% Upside, Buy)

• Repco Home Finance (Repco) reported 4QFY17 PAT of INR506m (7% above estimate), driven by a strong operating performance and low provisions.
  
• Sanctions/disbursements were down 25%/26% YoY, implying the lingering effect of demonetization. Our interaction with management suggests that disbursements in LAP remained subdued in 4Q, while those in home loans picked up sequentially. We expect disbursement growth to pick up in FY18 as the impact of demonetization fades away, government schemes gather pace and with the relaxation of ban on registration of unapproved plots by the Madras High Court in March.
  
• FY17 was a year of one-offs with state elections, Madras High Court order and demonetization driving loan growth to a 10-year low of 16% YoY. PAT for FY17 was up 21% YoY to INR1.8b, with RoA/RoE at 2.2%/17.4%.
  
• Spreads/margins expanded 50bp QoQ to 3.4%/4.7% in the quarter, driven by a 50bp reduction in cost of funds. This is in line with our thesis that REPCO is the biggest beneficiary (among HFCs) of MCLR cuts by banks in January as a) ~60% of borrowings are from banks and b) all bank borrowings are at MCLR, bulk of which are at 6/12-month reset.