What Make Repco Home Finance a Worthy Bet Despite Lack of Growth?

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Despite producing a reasonable profit, Repco Home Finance (CMP: Rs 295; Mcap: Rs 1,845 crore), an experienced mortgage lender in South India with over 15 years of business, is trading at a distressed value.

In the second quarter of FY22, it had a return on assets (ROA) of 2.9 percent and a return on equity (ROE) of 17.3 percent. Despite a drop in asset quality over the last year and a half, the lender’s profitability has remained strong.

Repco Home Finance (REPCO) had a difficult year in FY17, with headwinds in the shape of negative laws (a Madras High Court ruling prohibiting the registration of unapproved plots), demonetization, a sand mining ban in the state, and the NPL status of high-ticket LAP loans.

Earnings and stock performance suffered as a result of the poor business climate. REPCO has lost 30% of its value since its peak and has underperformed for the previous two years.

There are some early signals that things are about to change. For the regularization of some unapproved plots, a well-defined approach is currently in place.

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Our ground-level interactions suggest that a considerable number of unapproved plots have been regularized, with the remainder to be completed in the coming quarters.

Sand prices have risen dramatically in the last year. To address this issue, the government has taken several initiatives.

Meanwhile, the High Court of Tamil Nadu recently issued an order prohibiting sand mining in the state for the next six months and urging that sand be imported.

According to our research, the cost of imported sand, including customs charges, is one-third of the current mined sand rates in Tennessee. In this aspect, restoring normalcy will go a long way toward improving real estate demand.

While we forecast sluggish growth in FY18, we expect growth to rise up to 18-20 percent in FY19. The stock is trading at 2.5x FY19E BVPS, which is a discount to both peers and history. With a target price of INR750, this is a buy (2.5x FY20E BVPS).

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