Fixing for governance; building for durability
CANF has embarked on a journey to strengthen its governance framework and add new pillars to drive its next leg of sustainable and profitable growth. CANF has historically been one of the most durable franchises delivering healthy growth (25% AUM CAGR during FY11-FY23) and steady earnings (25% earnings CAGR during the same period). We believe that the recent incidence of fraud at one of the branches was an outlier event with the necessary corrective actions in place to mitigate the operational risk. CANF’s recent investments to widen its sourcing channels are likely to augment its customer funnel, thereby adding more legs to balance sheet growth. We reiterate our BUY rating on CANF with RI-based TP of INR 908 (implying 2.2x Sep-25 ABVPS) and our top pick among HFCs.
▪ Reinforcing the governance framework: Mr Suresh Iyer, the new MD & CEO, has been focusing on three key aspects: further strengthening of core functions, tech transformation for driving throughput and diversifying sourcing channels to augment growth. We believe these measures are likely to address the operational risks (such as the recent fraud at one of the branches) while also offering new growth catalysts.
▪ Augmenting the customer funnel: CANF is adding new sourcing channels to reduce its dependence on DSA-sourced business, currently at 82% (FY19: 51%). The new sourcing channels include sourcing from builders (approved project finance), process debottlenecking to drive higher throughput from branches, and digital sourcing (yet to be implemented). While DSAs remain a low-cost sourcing channel (~40bps of pay-out), channel diversification is likely to ensure a larger customer funnel and a wider customer profile.
▪ Exercising upside levers to scale: With >75% of its net total assets qualifying as housing finance for individuals, CANF has significant room to scale its non-housing portfolio. CANF is gradually building up this non-housing portfolio through measures such as longer-tenor LAP. Further, incremental branch additions have been skewed towards non-southern states that offer larger deployment opportunities.
▪ Investments to drive near-term higher opex ratios: CANF has embarked on an investment phase with branch additions (~15-20 annually) and tech transformation (INR 2.5bn of total cost over seven years), which is likely to drive opex ratios higher from ~16% currently to ~18% in the near term. We opine that these investments are an absolute must, given tech investments by most peers and relatively muted branch additions in the recent past.
▪ Profitability, growth intact; valuation remains attractive: Despite a ~45% rally in the stock price since our initiation in Apr-23, we believe CANF is attractively valued for the potent combination of medium-term growth (17% CAGR over FY23-26E) and profitability (17-18% RoE) that the franchise is poised to deliver.