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An all-round strong show

Can Fin delivered a 7%/8%/23% beat on NII/PPOP/PAT driven by a) healthy originations momentum (even amid branch inspections), 2) stabilized loan transfers, 3) significant back-book repricing, 4) stable NPLs and 5) positive credit cost (reversal of Rs150mn reserve provisions on conclusion of inspections with non-meaningful irregularities).

Growth and credit cost guidance seem palatable

Management has reiterated 18% disbursement growth target for the year and expects a credit cost of 20-24bps (clarified about earlier 40 bps being a stock guidance). Both growth and credit cost guidance seem palatable considering a) resilience shown by housing demand, b) co. offering material rate discounts (disbursement yield at 8.2% v/s marketed rate of 8.5-8.75%) at the time of onboarding, c) lower flow expected from restructured book (Rs7bn) and d) moderate level of Stage-2 assets (<2% of loan assets).

Margins to play out on expected lines; Gross NPLs to be stable

The risk on the margin should play out on the expected lines with sharp uptick in CP rates and gradual re-pricing of bank and NHB borrowings. Co. has raised lending rates by 25 bps from June, and this along with upward repricing of loans disbursed between Q2-Q4 FY22 by 25-50 bps would further increase the portfolio yield, which would mitigate the NIM decline by a reasonable extent. We expect portfolio spread to stabilize near 2.3-2.4% from current 2.6-2.7%. With collection trends similar or better than preCovid times and healthy momentum in NPL resolutions, Management expects Gross NPLs to remain around the current levels through the year.

Restoration of growth and credit cost visibility; Upgrade to BUY

Besides the strong operational performance in the quarter, a key positive was restoration of growth and credit cost clarity, emerging from conclusion of the pan-India branch audits with non-meaningful quantum of irregular loans. The growth stance would likely revive from hereon, also supported by benign asset quality trends i.e. lower flow expected from restructured book and modest level of Stage-2 assets (<2% of loan assets). We expect 18% loan, avg. 20 bps credit cost and avg. 16% RoE delivery (not factored capital raise) over FY22-24. In this context, the valuation is attractive at 1.8x FY24 P/ABV. Upgrade the stock to BUY.

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