Growth acceleration and equity raise can re-rate valuation further; Retain BUY with 12m PT of Rs550
Can Fin's Q2 FY21 result was exceptionally strong on the back of sharp NIM improvement and modest provisions (backed by management assessment of potential stress and extant healthy provisioning buffer). We concur with management that NPL increase and restructuring quantum would not be significant considering encouraging collection trends (93% in Sept and 96-97% in Oct) and customer profile of the book. Credit cost from H2 FY21 is expected to large normalize (15-20 bps annualized).
While the NIM could stay around the current elevated level (3.9-4%) for a couple of quarters (10-20 bps incremental decline in cost of funds possible), it will most likely start to come-off from the start of next fiscal. Lagged impact of asset re-pricing (annual reset + lending rates already cut by >100 bps since March), persistent high volume of foreclosure requests (competitive intensity to increase both from banks and larger peers) and bottoming out of the rate cycle could cause NIM to decline to sustainable levels of 3.2-3.4% in the longer run. However, regularization of credit cost would cushion the margin decline impact on profitability. On a cross-cycle basis, we believe Can Fin is 1.8-2%/18-20% RoA/RoE franchise. Valuation (currently at 2.1x FY22 P/ABV) can re-rate further on loan growth pick-up and execution of the planned capital raise. Retain BUY with 12m PT of Rs550.
Collection & Bounce
- September collection efficiency at 93%, which is better than pre-Covid months. October collections are trending even better.
- Increase in bounce rate was 70-80% at industry level, but for Can Fin it was just about 20%. This demonstrates the quality of the portfolio
- 14% customers had not paid anything in the moratorium period, with bulk from self-employed segment. Within such salaried customers, only negligible % was impacted by job loss.
NIM & Liquidity
- Q2 NIM at 4.09% is not sustainable. Management will be happy sustaining at 3-3.5%, though it would take a while to reach here. Margins will contract as interest rate cycle reverses.
- Current spread at 2.86%, but sustainable at 2.4%.
- Company holds liquidity cover equivalent to next one year of business requirements.
- Engaged proactively with lenders to bring down the rates.
Asset Quality and Credit Cost
- GNPLs were at 0.7% on reported basis - proforma GNPL (incl. SC stand-still) only 6 bps higher.
- Company has so far provided Rs860mn towards potential covid impact (Rs360mn in Q4 FY20 + Rs360mn in Q1 FY21 + Rs130mn in Q2 FY21cr). Besides, there is Rs550mn NPL provisions and standard assets provisions (everything totaling Rs2.14bn).
- Covid provisioning buffer of Rs860mn factors expected NPL increase over next two quarters - so, additional provisioning requirement in H2 FY21 will be negligible - rather, management expects some write-back eventually.
- Gross NPLs are estimated to revert back to current level in four quarters.
- Rs14.4bn worth of delinquent pool as of March 1 who opted for moratorium stands reduced to Rs6.6bn as of September 30. This will be a part of the current delinquent pool which for Can Fin has historically been much lower than the industry.
- Will take 2-3 quarters for growth to normalize - In Q4 FY21 may reach 85% of peak level - will only be back to pre-Covid level by Q1 FY22.
- Home loan demand at 70% of last year level in Sept 2020.
- Focus will remain on affordable housing, and the co. will resume branch addition.
- Company has tightened credit policy for self-employed segment and will remain cautious for few quarters.
- BT-in has always been <20% of disbursements. Prepayment and foreclosures combined has historically been at 10-15% of the opening portfolio.
- DSAs contribute 50-55% to originations (always been so), but their role is limited to lead generation.
- DER has been improving for the past few quarters as growth has decelerated significantly. Currently, it stands at 7.75x.
- Though capital position is comfortable currently, the company intends to raise some capital in Q4 FY21.
Shares of CAN FIN HOMES LTD. was last trading in BSE at Rs.455.65 as compared to the previous close of Rs. 462.75. The total number of shares traded during the day was 43319 in over 1204 trades.
The stock hit an intraday high of Rs. 470.2 and intraday low of 453. The net turnover during the day was Rs. 20089323.