REPCO home finance

My concern on Repco is it is operating on pretty thin spreads (as per last concall spread on incremental loan book were around 2%, though it is higher on full book) and while it would be able to pass on increases, there is lesser margin for error. Also concerned about whether loan quality in newer markets is as good as the TN market, this may be an issue with a lot of the newer entrants.

On plus side, problems in TN which is 60%+ of loan should be getting sorted and with fall in price it seems quite reasonably priced but it doesnā€™t have any moat that would make it stand out in a volatile/falling market.

Disc- invested

Anyone know whats the LAP percentage of total portfolio for FY18? Canā€™t seem to find it in their FY18 ARā€¦

Hello, anyone knows the reason behind recent fall in the share price of Repco finance? I looked on the web for any news related to Repco but did not find any recent articles that would justify the fall. Thanks

Pabrai funds has sold 563208 shares today in NSE and 385327 in BSE.

All HFC shares have a fallen because there is a fear that HFCs have a Asset Liability Mismatch

The stock shot up 42% in 3 days

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It shows cloning of famous investor blindly is not good thing. Pabrai fund has sold it around 400 level. But an investor who has not sold following blindly might have some relief now.

The current side way market is teaching lot of lessons now. And after 3~4 years we can see the VP investors will become more matured and have own set of doā€™s and donā€™ts ā€¦

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Investing in Lending Businesses , Repco business has been discussed in detail
https://indianinvestingconclave.com/recordings/64

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Thank you. Excellent thesis.

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Recently got interested in Canfin homes as it has lower NPAs, its price started moving up compared to other beaten down HFCs and also existing trouble in the HFC space (DHFL, Indiabullsā€¦) will help it grow preying on other companiesā€™ growth over the next couple of years.

As a case study, I thought of looking up Repco as well, given it was once considered high quality lender in the HFC space, while now being shunned by investors.

Based on my limited understanding of Repco, the issue seemed to have come due to high exposure to LAP and poor underwriting skills of the management in this area. If one listens to Uday Kotakā€™s conf calls, he continuously stresses on the poor collateral valuation practices that happen in market. The exact same thing seemed to have affected Repco here. LAP loans above 1 crore make about 8-10% of the loan book while they constitute 25% of the NPAs.

The worse part is that the management is still maintaining ~20% exposure to LAP and I couldnā€™t find any of their statements which tend towards admission of mistake in the conference calls (I could actually see pride in their words, not sure why though) and thereā€™s no commitment from them that theyā€™ll reduce their LAP exposure (I have been through only last three conf calls).

The cost of funding is also higher at 8.6% while Canfin has it at 7.9%.

Of course, Iā€™m looking at the company in hindsight and judgements are easy in hindsight but my objective was to understand why Repco had lost investor interest and whether those reasons would apply on Canfin homes. Just putting my thoughts on the forum too.

Iā€™m posting my notes for the last two conference calls here.

Conf Call Q2FY20:

  1. The loans in the salaried segment saw a smart 75% recreation jump to 407 crores, whereas the non-salaried segment decreased within the quarter.
  2. I would hasten to add that we are not moving away from our expertise. Weā€™ll continue to do non-salaried customers also, but because of the market situations, where GDP growth is lower and the economy ā€“ the income levels of non-salaried customers are under spread, we are deliberately moving to salaried customers.
  3. The repayment rate i.e. prepayment + normal payment was again higher at 19%. That was a challenge for us, but we maintained good pricing on the asset side.
  4. The exposure to self-invest segment or what we call it non-salaried segment, that remained highly at 53.4%, which we have reduced, but still meets higher than our target of 50%. And this salaried customer of 46.6%, we want it to be around 50%, as I told you.
  5. We have made a significant improvement in liquidity position. Our own balance sheet liquidity, i.e. cash and cash equivalents, was more than 500 crores. Yes Iā€™m telling more than 500 crores, which is almost 5% of our book size.
  6. Plus, during the quarter, we got ventures of more than 3000 crores from various banks. They are some of the biggest banks in the country. We got ventures of Rs 3000 crores at a competitive rate when all the NBFCs or HFCs are facing liquidity problems. And out of that, 2800 crores is undrawn as of 30th September. So we count on the liquidity, 500 crores, on balance sheet and 2800 crores off balance sheet.
  7. Thus, the cost of funds has gone down slightly to 8.6%. If you see in Q4 of last year, it was 8.8%.
  8. Major competition, today, for us, in terms of takeover, is strongly banks, both PSUs and Private.
  9. Banks donā€™t compete on lower ticket size. But our book is always a mix of lower, middle and higher ticket size. Well, average is Rs 14 lakhs, but the lower can be Rs 8 lakhs to 10 lakhs. And most of that are, say, Rs 20 lakhs but some loans are Rs 25 lakhs, Rs 50 lakhs, Rs 1 crore, Rs 2 crores, Rs 3 crores. So it is the competition that is coming in Rs 30 lakhs bracket, but because of that, we are not able to do much of higher ticket loans.
  10. The main thing is that for the people who are financing as well giving loan to nonsalaried customer, it is actual income that is taken for assessment vs. the documented income. That is that somebody has a document of only Rs 50000 income. Should we consider this income, but his actual income is higher. That is where the difference comes. Now that ratio, I cannot share of course as that is our USP. But that ratio has shrunk in the last 6 months. The actual income taken for assessment, divided by documented income, for which proof is available with the customer, that has shrunk. That has come down.
  11. Yield on home loans is 10.7% vs 10.6% in Q1. In LAP, it is 13.7% vs. 13.3% in Q1. Overall the yield is 11.3% which was 11.2% in Q1.
  12. We generally do about 10 to 15 branches per year. We have already added about 5 branches in the first half, and then 4 branches, we are going to add maybe in the next couple of months. Some are in Tamil Nadu. Some are in other parts. So we donā€™t believe in adding too many branches together, so probably 10, 15 per year will continue.
  13. DSA proportion in sales has increased to 18%. Mostly outside TN, particularly in GJ and MH, but some in KA as well as AP also. Some are in TN also, but most of it is in Western India.
  14. Higher NPAs are in LAP category and non-salaried.

Conf Call Q1FY20:

  1. The balance between our exposure to this self segment and the talent class stood at about 54.2% and 45.8% respectively. The share of nonhousing loans that is last in the loan book increased marginally to 18.5%, up from 18.2% reported last year.
  2. We open branches only with three employees. It is not like a commercial bank where we need 12 to 15 employees per branch. At some branches, we open with two also because in the first year we give some of target of only 10 crores.
  3. Our target is to have overall cost-income ratio of less than 40%.
  4. Our incremental yield on home loans is 10.6% and LAP is 13.3%. Overall it is 11.2%.
  5. There were two to three reasons on increasing liquidity to 200 crores. One is that the banks, because to boost their balance sheet they requested us that and weā€™re to deploy it. Second, also, some of the banks, just to give comfort, while we convinced them that we have enough liquidity, but they almost have models where they want to seek cash on the balance sheet. We thought, okay, weā€™ll keep for some time. It will not be recurring.
  6. Our LCR is more than 200%. Because our CFO is saying, these are, one, LCR, as you know, is different. Usually, liabilities maturing 1 month, minus asset maturing 1 month. That is about Rs 70 crores. And then the cash we are maintaining is about 200 crores.
  7. Total NPA accounts are 2200. Over 1 crore NPAs are about 25% of NPAs. In the total loan book, over 1 crore loans constitute about 8% to 10%. If weā€™re looking at this question as to whether 1 crore loans resulting to higher NPAs, then, yes, we did some LAP loans in 2013-14 and that is causing higher NPAs.
  8. Branches which are less than 5 years old, their NPA percentage of the book size is less than 1%.
  9. We attribute 90% of NPAs to the macroeconomic factors.
  10. Tamil Nadu book size is 56% but Tamil Nadu NPA contribution is about 70% because most of our overall book is on Tamil Nadu.
  11. Last one year, we have recorded about Rs 45 crores by sale of properties. In Q1, it was about 8 to 10 crores.
  12. DSAs contribute about 15% of the sales.

Discl: No holdings in any mentioned companies. Still studyingā€¦

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ā€œWe will concentrate in these cities where the ticket size flats ranging between Rs 20-25 lakhs are available instead of concentrating in big cities where a flat costs around Rs 1-2 crore. We will also focus on flats ranging between Rs 10-15 lakhs.ā€ - Yashpal Gupta, MD & CEO, Repco Home Finance

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Q4 Concall highlights

Collection Efficiency & Bounce rate

68% of customers paid their EMI in June. The collection trend has improved further in July
and most likely 75% of customers are expected to pay. Management believes that the normal
collection rate of 95% can be achieved by October/November if Covid flattens out.

The collection rate is 95%+ for non-moratorium customers (chosen not to opt for June and
in cases where company did not find requirement), which is comparable to pre-Covid era.

Though the first presentation bounce is slightly higher currently (17-20% v/s 15% before
Covid).

Almost all customers who opted/given moratorium in June are the ones who were under
moratorium in the first moratorium period.

Disbursements

Disbursements are now at 50% of pre-Covid level. By end of Q3 FY21, company believes
that it can achieve 80-90% of pre-Covid quantum.

The initial focus of disbursements would be on better CIBIL score clients.

About Rs90bn of the loan book (nearly 80%) is in Tier 2-4 cities. Negligible competition from
banks and other HFCs for fresh disbursements; however, most PSU Banks and some private
banks have been aggressive in loan takeover from Repco.

Liquidity position

Even in the second moratorium phase, Repco has not availed moratorium from its lenders.
Company currently has Rs3bn worth of cash/FDs, about Rs20bn of undrawn sanctioned lines and additional sanctions in the pipeline. Liabilities maturing in coming 3 months is about
Rs8bn and coming 6 months is Rs12bn.

Incremental cost of borrowing has been coming down at a fast clip. Incremental funding tie-
up was at around 7% during the April-July period, but it included liquidity from NHB at lower
rate.

Asset quality and additional provisions

The additional covid-related provision of Rs0.4bn made by Repco was based on portfolio
assessment on four parameters viz. a) customersā€™ area/location in context of Covid incidence, b) borrowerā€™s occupation, c) number of defaults in six months before Covid and d) whether moratorium taken or not taken.

These provisions represented management overlay on the ECL requirement and are thus
additional provisions spread across Stage 1, 2 and 3 customers (majority attributable to
Stage-3). The management intends to make further prudential provision in Q1 FY21.

GNPLs in Home Loans segment stood at 3.8% and in LAP at 6.6%. GNPLs for salaried
customers was at 1.6% and for self-employed borrowers at 6.7%.

Repco expects to reign in GNPL ratio at 4.5% by the end of current fiscal. This expectation
stems from a) improving collection trends (morat % coming down and normal collection
efficiency in non-morat book), b) significant reduction in Stage-2 assets over FY20 and
sustenance at lower level even as of June, c) >90% of loans for self-occupied homes and b)
only 5% of home loans representing booking for under-construction apartments in projects
of small and large builders.

The collection of soft and hard buckets is in-house and only in cases of chronic NPLs (2+ year
older) the company seeks support of recovery agencies.

Majority of the LAP NPLs represent high-ticket (>Rs10mn) legacy loans. Over the past three
years, the average ticket size of the portfolio has been brought down significantly and concentration has been reduced.

In FY22, management believes that GNPLs could come down to 3.5% if the macro scenario
improves.

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Tamil Nadu has itā€™s election on 6th April - Do you think it can impact on the business of Repco? As most of the times, the politicians love to offer loan waiver.

Moreover, itā€™s NPA is still quite high, therefore, if you are invested in the same- what is your rationale of staying invested?

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Hi Investors,
How do you read on the liability side of the company ā€¦

  1. how do you consider this , 0 liability from NCDā€™s (is the bond market not trusting the company )ā€¦

  2. incase if its strategic management call , is it not a bad management decision to skip NCDā€™s @8.05 (and commercial banks @7.26%)and go to parent @8.20%

This stock looks very interesting at current levels. Valued at 0.7 BV and 6 forward PE.
With covid situation under control, asset quality and growth should improve from here.

A low cost housing company for informal sector and a quasi PSU (like CanFin, LIC Housing and GIC housing) makes it very interesting play.

They have managed their books very well across two very bad cycles of demonatization (hit informal sector really hard which forms majority of their customers) and covid (again informal sector was hit hardest). This shows that organization has right culture and reasonably good underwriting skills.

Both Motilal and HDFC sec have target prices north of 400 and ICICIsec has target price of whopping 650.

With growth and re-rating both playing out for next few years, this can be quick multi-bagger.

Disclosure: Invested at current levels

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Good results
https://doc.repcohome.com/uploads/RHFL_Q2_FY_22_Earnings_Presentation_V1_2bc0614ff9.pdf

Something is brewing here :

Disc : Not Invested.

This was a disaster for me. Existed at 30% loss.

Learning: Always stick to market leader in any segment.

Any specific reason for this fallā€¦ post the management change, atleast optically the reported numbers look good! Valuations look non demanding tooā€¦