Add Can Fin Homes Ltd For Target Rs.730 - Yes Securities
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Elevated credit cost guidance to weigh
Can Fin delivered 7-8% NII/PPOP beat on a) stronger-than-expected loan growth (6.5% qoq/21% yoy) backed by robust disbursements (6% higher than estimate, up 9% qoq/35% yoy), b) improvement in loan spread (higher 6 bps qoq on similar increase in portfolio yield from back-book re-pricing (had disbursed Rs30bn worth of loans in H2 FY21 at much lower rates) and 3) higher insurance distribution income (clubbed in NII; stood at Rs60mn in Q4 FY22 v/s Rs36mn in Q3 and a much smaller number in Q4 FY21). Asset quality performance was strong too with 10 bps reduction in both Gross/Net NPLs and recoveries through SARFAESI and OTS being higher than NPL additions. Credit cost was elevated at 50 bps on account of 1) increase in NPL coverage to 53% due to bucket changes, 2) contingency/reserve provision of Rs150mn due to 4th wave uncertainty and 3) higher std. assets provision on stronger loan growth. Q4 FY22 was also characterized by further recovery in growth of SENP segment (grew 6% qoq/15% yoy) and persistent increase in the share of Top-up and LAP loans (portfolio contribution has risen to 9.1% from 8.1% as of Q1 FY22).
While management maintained its bullish stance on growth (near Rs100bn disbursements in FY23 and loan growth at 18-20%), the guidance of 40 bps credit cost came as a surprise given a) strong asset quality trends and reserve provision creation in Q4 FY22, b) co. had unwound buffer/Covid provisions in Q2, c) growth has been driven by Salaried customers in the past 5-6 quarters and d) avg. credit cost was <30 bps in Covid impacted period of FY20-22. We consequently cut earnings and RoA estimates by 4-6% and 10-20 bps respectively. We would monitor credit cost and NPL trajectory as it would reflect on the quality of portfolio onboarded at relatively higher rates and can potentially impact growth rate too. The earnings cut and close lens on asset quality could cap upside and thus we downgrade the stock to ADD from BUY. Our revised 12m PT is Rs730.
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