Repco Home Finance is an attractively valued housing finance company (HFC) with a niche loan book (salaried/professional borrower mix is 48:52, Tamil Nadu forms 56% of loan book) with stable asset quality, strong ratings and good return ratios. Repco Home Finance is well capitalised and has a strong business model. Despite the fierce competition in the home loan market, Repco’s presence in the niche small-ticket, non-salaried home loan segment has helped it maintain attractive spreads as compared to peers as well as face lesser competition from banks, etc.

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Repco Home Finance has an attractive business model of housing mortgages, which caters to a segment largely under-served by banks and other NBFCs. Small ticket, non-salaried borrowers represent an attractive but challenging business opportunity (granular segment, which requires a player with diligent risk management, deep understanding and high level of servicing). Hence, despite the segment comparatively offering higher yields, banks and large HFCs have found it difficult to penetrate in this space. Industry reports indicate that while housing sales in Chennai fell by 43% in 2020 due to COVID-19 and its impact, the Confederation of Real Estate Developers’ Association of India (CREDAI) has indicated that sales have picked up in the past four months.

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For Repco Home Finance, however, disbursements have picked up pace since September and the HFC is looking to return to growth in FY2021E itself. In Q3 FY21, Sharekhan expects stable NIMs and near normal disbursements for Repco Home Finance. Its collection efficiency for September 2020 stood at 93% with 90+ days per due (dpd) stable at 4%. Sharekhan believes that developments such as increased pricing changes will help offset for medium term possible credit risks emanating.

Moreover, easy funding availability has aided in a fall in cost of funds, and hence we expect NIMs to be protected from risks in the medium term as Repco Home Finance substitutes high‐cost liabilities with low‐cost ones. While NBFC-HFCs operate in the smaller-ticket size housing loan segment, Sharekhan believes that experience & knowledge are key differentiators for HFCs and this facet makes it difficult for banks to compete. This explains why RHFL has been able to maintain its NIMs at 4.5% despite interest rate cycles and fierce competition in the home loan market.

A strong business model, stable ratings and strong historical underwriting, with attractive return ratios make Repco Home Finance one of the attractive players in the niche housing finance space, and we believe that the economic recovery, improving demand and a resilient rural economy brighten the growth outlook.

Key risk:

Delayed recovery in economic activity and an adverse interest rate regimen will affect growth and profitability. Stress of migration of performing assets to banks & other HFCs on account of takeovers may impact overall asset quality.