Edelweiss believes management is on track to limit gross non-performing assets to sub-2 percent levels by end of this fiscal.
Repco Home Finance shares rallied nearly 14 percent intraday Tuesday after strong set of earnings for July-September quarter. Edelweiss has maintained its buy rating on the stock with a target price of Rs 892 per share.
The target price implies 51 percent upside in the stock compared with its Monday's closing price.
Edelweiss believes structurally Repco Home Finance has the potential to grow manifolds in under-served markets capitalising on emerging opportunities, which will help deliver superior return ratios.
"Repco Home Finance’s encouraging Q2FY18 performance was marked by trend reversal in both growth and asset quality after 3 quarters of below-par show. Growth momentum started to build up and disbursements at Rs 750 crore (up moee than 35 percent QoQ), reflected the improvement in Tamil Nadu (TN). While AUM growth was soft at 10 percent YoY, sustained traction in disbursements and low base will lead to better H2FY18 (RHF maintained 18% growth guidance)," Edelweiss said.
The housing finance company's second quarter profit increased 22.3 percent year-on-year to Rs 55.9 crore and revenue grew by 7.5 percent to Rs 279 crore.
"Repco Home Finance has changed its provisions requirement for Doubtful-1 category to 75 percent (earlier 100 percent, still much higher than the regulatory requirement of 25 percent), which led to better than estimated profit of Rs 55.9 crore," Edelweiss said.
Unwinding of interest income, sustained pricing along with funding cost benefits fed into 50bps QoQ rise in net interest margin, leading to more than 17 percent net interest income NII growth, it added.
The research house expects 16-18 percent loans CAGR over FY17-19 and estimates more than 20 percent earnings CAGR over FY17-19, with return on assets of 2.4 percent and return on equity of more than 18 percent.
Asset quality also improved in Q2FY18 with gross non-performing assets at 3.4 percent (against 4 percent in Q1FY18), driven by better recovery in loan against property (LAP) and non-salaried segments.
Edelweiss believes management is on track to limit gross non-performing assets to sub-2 percent levels by end of this fiscal.At 10:39 hours IST, the stock price was quoting at Rs 640.50, up Rs 49.80, or 8.43 percent on the BSE.