Collection efficiency holds the key
* CIFC reported ~58.1% yoy and 37.9% qoq decline in disbursements to Rs35.9bn as the lockdown impacted overall demand and management preferred conservative underwriting during this volatile period. AUM growth was steady at ~10.4% yoy (+4.9% qoq) on a fall in repayments to 1.1% from average 9-10% due to elevated moratorium.
* Moratorium remained elevated at 74%; however, the company has indicated that roughly ~50% of the customers under moratorium have started paying, with ~34% of customers under moratorium paying more than one EMI already. Overall provisioning charges remained low at Rs562mn (~36bps of AUM) vs. Rs5.5bn during the last quarter
* We like CIFC due to its diversified product portfolio (within the vehicle finance), strong liability franchise and efficient underwriting and recovery practices. Though NPA trends are expected to remain volatile due to Covid-19-related lockdowns, CIFC is well-placed to regain growth momentum and manage asset quality with its strong collection efficiency.
* We are raising our disbursement numbers and provisioning charges spread across FY21- 22E, leading to ~9.1%/14.1% increase in our FY22/23E earnings. We roll forward valuations to Sept’22E. Maintain Buy and raise TP from Rs190 to Rs230 (~1.6x P/Sept’22E Book). We are EW on CIFC in sector EAP.
What we like about CIFC results
* Operational performance was healthy amid slowing growth and volatile markets. Margins are expected to improve with the easing in liquidity and the completion of moratorium.
* Opex during the quarter declined ~1.2% yoy (-13.9% qoq), resulting in Cost-to-Average Assets improving to ~2.2% ─ a historic low for the company.
* CIFC has cash-in-hand and sanctioned lines of around Rs100bn as of May 31, 2020. This adequately covers the needs of the ALM.
Where we remain concerned
* AUM growth was backed by lower repayments amid elevated moratorium levels. However, weak disbursements should gradually get reflected in AUM growth as well.
* Lower provisioning raises concern among investors as most lenders have been increasing coverage to avoid volatility in future earnings.
* CIFC, however, seems to have adopted the other route and remains confident of its collection efficiency, and expects limited credit loss after the completion of moratorium.
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