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Repco Home Finance Ltd (CMP – 255.20)

Repco Home Finance (RHFL), is promoted by Repco Bank is a housing finance company (HFC) with strong concentration in south India, especially Tamil Nadu incorporated in April 2000. RHFL is operating through 153 branches and 24 satellite centres in Tamil Nadu, Andhra Pradesh, Jharkhand, Kerala, Karnataka, Maharashtra, Madhya Pradesh, Gujarat, Odisha, West Bengal and Puducherry. The NBFC operates in Housing Finance with innovative loan products, direct customer contact and customer ownership, focus on quality customer servicing, transparency and speed of operations, focus on relatively under-penetrated markets and balanced portfolio mix, robust risk management systems and processes, low cost operations, well recognized brand in south India with an established track record, stable and experienced senior management team. The Company’s products have been developed to suit the needs of different customers.

Repco Home Finance (RHFL) is an attractive HFC with a niche loan book (salaried, non-salaried) with stable asset quality, stable Ratings and attractive return ratios. The HFC is backed by strong capitalization, and despite the competitive intensity in the home loan segment, due to its presence in niche small ticket, non-salaried Housing loan segment Repco has attractive spreads as compared to peers. Repco Home Finance (RHFL) has an attractive business model of housing mortgages which caters to an under-served segment by banks and other NBFCs. The small ticket, non-salaried segment is an attractive but very challenging business that requires a player with diligent risk management, deep understanding of the market and focus. The company has witnessed a steady growth and is increasing its geographical footprint by deepening its reach selectively in existing regions and expanding to new regions, with continuing focus on under penetrated markets, focus on risk management, accessing low cost and diversified sources of funds, and maintaining low operating costs. The company has a sound risk management system in place.

RHFL 179 points of presence comprising of 153 business branches, 2 asset recovery  branches and 24 satellite centers; presence in 12 states and a union territory; greater focus on direct sourcing. During the year, the company converted 4 satellite centers into branches, opened 5 new branches and 2 new satellite centers, taking the total network to 153 branches and 24 satellite centers. The company ventured into the State of Rajasthan with a branch and added 2 more branches by the end of the year. The retail network now is spread across states of Tamil Nadu, Karnataka, Andhra Pradesh, Telangana, Kerala, Maharashtra, Odisha, West Bengal, Gujarat, Madhya Pradesh, Jharkhand , Rajasthan and the Union Territory of Puducherry.

The company’s sources of customer acquisition are loan camps , customer walk-ins, referrals, direct selling agents and direct sales teams. Of these, loan camps contribute to over 35% of incremental originations. Manager of every branch conducts a loan camp once in every 2-3 months where, a primary assessment of customer documents is done and an in-principle sanction given. The customer then approaches the branch for further processing of his/her loan. The branch personnel act as single point of contact to customers and are responsible for sourcing loans, carrying out preliminary checks on the credit worthiness of potential customers, providing assistance in documentation, disbursing loans and monitoring repayments and collections. This way the company ensures that there is no conflict of interest and level of accountability is very high. The share of DSA driven business was about 18%

of total incremental business generated in FY20.

RHFL saw rise in Stage-3 (NPAs) assets, which were higher than its earlier run-rate. However, mitigating factors are provisioning has also been higher and conservative. The company has adequate cushion in provisions as seen from the historically observed loss given default (LGD) and hence has comfortable asset coverage. While near-term asset quality may be volatile mainly as a result of the impact of migration of performing assets to banks & other HFCs on account of takeovers that may impact overall asset quality. However, with pickup in disbursements and seen on a yearly basis, we believe that asset quality trends will smoothen out.

The stock at the CMP of Rs.255.20 trades at about 5.72x its trailing twelve months EPS. We believe that the stock is grossly undervalued and has the potential to deliver multibagger returns in the medium term. We recommend a Strong Buy on the stock considering the strong business outlook & attractive valuations.

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