Key re-rating triggers in place; Mixed bag for Q3
• A fraud at Can Fin Homes’ (CANF) Ambala branch in Q2FY24 led to the complete overhaul of its underwriting process. The transition to a centralised disbursement and reconciliation system in October 2023 resulted in a sequential moderation in disbursement and overall credit growth in Q3FY24. Disbursements fell 23% YoY and 7% QoQ to INR1,879cr in Q3 which led to a moderation in AUM growth against the management’s earlier guidance of an acceleration in disbursements in H2FY24.
• CANF reported healthy NIM expansion (up 45bp YoY and 12bp QoQ) at 3.92%, leading to NII growth of 31% YoY and 4% QoQ. We expect NIM to stay elevated for the next few quarters due to: i) a rating upgrade by ICRA to AAA from AA; and ii) expectations of NHB refinancing. Other income was steady at INR7cr. Net revenue grew 31% YoY and 4% QoQ to INR336cr (3% beat).
• Opex came in lower than anticipated aided by lower employee expense. Total opex fell 6% QoQ, translating into a C/I ratio of 15% (est. 17%). Opex is expected to stay higher due to an IT expense of INR15-20cr in FY25. PPOP grew 35% YoY and 6% QoQ to INR287cr (6% beat).
• We had estimated a credit cost of 40bp due to a higher restructured book. CANF reported an in-line credit cost. A higher-than-expected margin expansion and lower operating expenses led to an 8% beat on PAT at INR200cr, up 32% YoY and 27% QoQ. We expect credit cost to stay in the 10–15bp range over the next few quarters.
• It reported healthy return ratios in Q3FY24, with a RoA/RoE of 2.3%/19.4%. We expect a RoA of 2.1%/2.2% and a RoE of 18%/18.5% in FY24/FY25.
• The entire restructured book emerged from the moratorium in November 2023. Slippages from the restructured pool were elevated, resulting in a further deterioration in asset quality.
• We expect credit growth to accelerate from FY25 with the tightening of systems and processes, a strong distribution channel, the centralising of the credit underwriting process, a stable NIM and return ratios, and an improvement in asset quality. We reiterate ‘BUY’ with a TP of INR900.
Credit growth moderates, pares guidance for FY24
An overhaul of its credit underwriting procedure led to a moderation in disbursement, which reduced the pace of AUM growth in Q3FY24. Advances grew at a moderate 13% YoY and 2% QoQ to INR34,053cr due to the aforesaid reasons. Overall credit growth was aided by top-up loans (up 17% YoY and 3% QoQ) and mortgage loans/flexi LAP (up 14% YoY and 1% QoQ). Housing loans grew 13% YoY and 2% QoQ and constituted 89.1% (unchanged sequentially) of overall advances. The management is targeting a disbursement of ~INR2,500cr/INR1,000cr in Q4FY24/FY25, translating into a loan growth of 13–14%/16–18% in FY24/FY25. We believe a credit growth of 16–18% is achievable on account of the modernisation of the entire system and processes, strengthening of the distribution channel, a higher ticket size, and a centralised credit underwriting process.
Deterioration in asset quality due to slippages from the restructured book
The entire restructured book emerged from the moratorium in November 2023. Slippages from the restructured pool were elevated (added ~0.28% to GNPA), leading to a deterioration in asset quality. GNPA/NNPA rose 15bp/6bp to 0.91%/0.49%. PCR stood at 45.8%. To counter the elevated slippages from the restructured book, it provided a management overlay of ~INR34cr. Asset quality remained stable despite adjusting for slippages from the restructured book. Stage-2 assets grew 130bp QoQ to 4.7%. The management guided at a GNPA of 0.7–0.8% for FY24.
Valuation and view
CANF posted a mixed bag of earnings in Q3FY24. A subdued disbursement led to muted loan growth and a deterioration in asset quality. A significant expansion in NIM resulted in healthy operational numbers as well as return ratios. We expect an acceleration in credit growth with a stable NIM, elevated return ratios, and an improvement in asset quality. Given the attractive valuations and expected improvement in most parameters, we reiterate ‘BUY’ with a revised TP of INR 900 from INR 920 due to 4-5% earning cut, implying an upside of 20% from its CMP.
Click here to download Can Fin Homes Q3fy24 result update by Nuvama
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