Result Highlights

* Q4 FY21 performance of Can Fin distinctly highlighted outcomes of the aggressive pricing strategy (in‐line with banks and large HFCs) adopted by the management from November 2020.  

* Amid a strong recovery in housing market, the growth response to competitive pricing was robust in Q4 ‐ approvals and disbursements jumped 80% qoq/40% yoy to be at an all‐time high. 

 * Net portfolio accretion was Rs11bn in the quarter, and reflected growth of 5% on Q3 base. As a consequence of substantial disbursements and even re‐pricing of existing loans at significantly lower rates (now 22% portfolio at new pricing), the NIM declined by 43 bps in Q4 to 3.7%; notwithstanding a 16‐bps correction in cost of funds. Incremental lending rate in Q4 was 7.3%, whereas the portfolio yield stands at 9.5%.  

* Asset quality has been quite resilient for Can Fin with slippages in FY21 being lower than FY20, and a small restructuring book of 40 bps of loans. Company carries surplus Covid provisions of Rs700mn (35 bps of loan book).

Our view –

Need to balance growth and margins adeptly; retain BUY: Beyond some impact of the pandemic resurgence in the near term, the medium‐to‐longer term growth for the co. hinges on a) headroom to remain competitive in pricing (underpinned by the intent to protect NIM/Spread at 3%/2.3%), b) competitive intensity in the market (unlikely to ease in the foreseeable future) and c) strength of recovery in housing demand in affordable and mid‐market segments.

Considering the current liability mix and re‐pricing structure, incremental funding cost is set to crawl up; thus, would pressurize margins further and after a threshold pushing management to unwind current strategy.   We see a combination of 13‐15% growth, 3.2‐3.3% NIM and 1.8‐1.9% RoA plausible for Can Fin over FY21‐24. Expect valuation to re‐rate on likely 15‐16% ABV compounding and a strong balance sheet (best amongst the HFCs). Retain BUY and 12m TP of Rs650.

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