CAN FIN Homes Limited
Poised for stronger performance
In the Investor Meetings hosted by us, Can Fin Homes have expressed significant confidence in delivering improved disbursements and loan growth and lower NPLs and credit cost over the coming quarters. Spread/NIM is expected to remain resilient in the near-term and glide towards the guided level of 2.5%/3.5% in the medium term. Management’s aspiration is to grow loan assets 2-3% above the industry without compromising on risk profile and profitability. Capital raising is not required for 15- 17% loan CAGR considering expected sturdy RoA/RoE of 2-2.2%/17-18%. The return ratios would get a cushion from normalization of credit cost amid some trade-off of margin for growth and the planned investment for Tech overhaul.
The underwhelming factors of recent quarters, which is sub-optimal disbursements and higher slippages, would significantly turnaround in coming quarters. Hence, the valuation focus/narrative would shift to steady-state growth and profitability (which has been healthy for Can Fin). Current valuation of 2.1x P/ABV and 12x P/E on 1-yr fwd. basis, which is significantly below long-term mean, does not fully reflect the high likelihood of a stronger disbursement and credit cost performance. Can Fin’s healthy RoE of 18% also needs to be valued in the context of lower risk and variability associated with it (Avg. RoE of 19% for the past 10 years). Co.’s RoE and Balance Sheet quality stands superior to other prime HFCs and the Affordable HFCs.
Multiple growth levers viz. productivity, pricing, ticket size, branch addition and new channels
Levers that would drive better business in future would be 1) synchronization/improving adjustments of disbursement operations on the strengthened process, 2) impetus on branch addition and raising productivity of underperforming branches, 3) focus on sourcing from new channels like digital aggregators, developer tie-ups, etc. 4) emphasis on higher loan tickets and 5) running of competitive pricing schemes enabled by current strong spreads/margins. Notably, the branch staff attrition has been stable and there has not been any meaningful increase in sanctioned case rejections or customer dropouts under the changed process. The overall disbursement TAT has not seen any meaningful increase.
Can Fin would add 15 branches in the current fiscal (including seven in Q4) and intends to add another 15 next year. The focus is on adding presence outside the Southern region and in states of MH, GJ, RJ, NCR and MP. With the contribution of new channels expected to rise and direct sourcing by branches likely to improve, the share of DSAs in disbursements is estimated to decline from current 79% to 60% in 3-4 years. Within originations, the share of Rs.20-30 lac ticket segment and >Rs.30 lac ticket has increased in recent quarters, driving an accelerated rise in avg. ticket of new housing loans (20-25% uptick in past two years). Any transient impact from the planned tech systems overhaul (implementation of new LMS, LOS, etc.) in FY25 would be absorbed within an enlarged sourcing funnel, as per the Management
Resilient margin management thus far, but some moderation expected
Company has managed its NIM/Spreads quite well in the current funding rate hike cycle without risking its ALM (CP share has declined and NCD share has marginally increased). Rate actions were timely and well-measured on the back book and new loans, while retaining growth competitiveness and BT Out. To minimize the lag between repricing of borrowings and loan assets, Can Fin has introduced quarterly rate reset for new loans from January 2024 and has given the option of shifting to existing customers also. The co. has always enjoyed finest pricing from banks (incr. cost at ~8% blended) and NCD borrowing cost has declined after the recent rating upgrade (recent issuance at ~8.25%). Further inch-up in funding cost, sustenance of pricing competitiveness and incremental growth shift towards >Rs.20 Lac loans is expected to gradually moderate Spread/NIM towards guided levels of 2.5%/3.5%.
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