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Strong AUM growth of 40% YoY; announces ~INR40b equity raise

* CIFC’s PAT grew 28% YoY to INR7.3b (18% miss), while NII rose 24% YoY to INR18.4b (5% miss) in 1QFY24. NIM contracted by ~30bp QoQ to 6.7% on account of a ~40bp QoQ increase in borrowing costs.

* Opex remained elevated, with the cost-income ratio increasing ~160bp YoY to ~37%. PPoP grew 26% YoY to INR13.4b (10% miss) in 1QFY24.

* GS3/NS3 increased ~5bp QoQ to 3.1%/1.7%. Annualized credit costs stood at 1.3% (PY: 1.5%). Optically, annualized (gross) credit costs in new businesses stood at ~5%. However, there were also ~INR350m in recoveries under various FLDG arrangements, which were reported under other income.

* New businesses contributed ~23% to the disbursement mix in 1QFY24. Despite relatively higher credit costs in new businesses, higher yields will allow CIFC to be RoA accretive from FY25 onward.

* CIFC will be able to offset any significant NIM compression in FY24, driven by its ability to change the product mix in vehicle finance toward highyielding used vehicles. We expect NIM to bottom out in 1HFY24 and start expanding in 2HFY24. We model NIM to decline ~25bp YoY to 6.8% in FY24.

* We model a disbursement/AUM/PAT CAGR of 26%/30%/34% over FY23- FY25. We cut our FY24E EPS by ~3% to factor in NIM compression. The company has announced an equity capital raise of ~INR40b via QIP in FY24, but we have not yet built this in our estimates.

* CIFC has levers on cost ratios and business AUM growth to deliver healthy RoA/RoE of 2.8%/24% in FY25. We have strong conviction in sustained delivery of profitable growth in this franchise. Maintain BUY with a TP of INR1,350 (based on 5x FY25 BVPS).

* Key Risks: 1) Higher delinquencies and credit costs in new businesses, particularly CSEL; and 2) Deep cyclicality in the Vehicle Finance business even though the management is making efforts to reduce this cyclicality.

Key highlights from the management commentary

* The company has guided for <1% credit costs in the Vehicle Finance business in FY24. Both Stage 3 and Stage 2 in VF should exhibit further improvement.

* The management shared that it does not anticipate any further increase in the borrowing costs, subject to a status quo in the policy repo rates. VF yields should also improve gradually, leading to an improvement in NIM.

Valuation and view

* The vulnerable asset pool (Stage 2 + 3) declined ~10bp QoQ to 6.6% despite 1Q being a seasonally weak quarter. The improvement in the 30+dpd pool suggests that organic collections without any extraordinary write-offs contributed to the improvement. CIFC carries ECL/EAD of ~2.2% (vs. 1.75% prior to Covid-19).

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