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Strong growth outlook reiterated

Management retained 18% disbursement growth target for the year. In our view, the growth momentum should largely continue even amidst the MD & CEO transition given a) the organization has developed an inherent rigor for growth, b) the property markets remain buoyant both in terms of transactions and price trends (KTK & TL are two largest markets for Can Fin contributing 43-44% of portfolio), and c) Can Fin’s relative pricing has become more competitive v/s larger banks and HFCs (rack rate and incr. yield difference has come down to 50-100 bps from >100 bps some months ago).

Credit cost estimate lowered to 12-14 bps (from 20-24 bps)

Management retained 18% disbursement growth target for the year. In our view, the growth momentum should largely continue even amidst the MD & CEO transition given a) the organization has developed an inherent rigor for growth, b) the property markets remain buoyant both in terms of transactions and price trends (KTK & TL are two largest markets for Can Fin contributing 43-44% of portfolio), and c) Can Fin’s relative pricing has become more competitive v/s larger banks and HFCs (rack rate and incr. yield difference has come down to 50-100 bps from >100 bps some months ago).

Credit cost estimate lowered to 12-14 bps (from 20-24 bps)

Can Fin moved to ECL provisioning from IRAC provisioning in the current quarter, since ECL requirement was higher at Rs2.1bn v/s Rs2.05bn under IRAC. This shift led to provision release of Rs210mn on NPLs and higher provisions of Rs330mn on Std. Assets (incl. undisbursed line of credit). Adjusted for this one-time migration impact, the credit cost was marginal since net NPL addition was negligible. Restructured book stood at Rs6.5bn (Rs7.05bn with accrued interest), and the co. is carrying provisions of Rs670mn on it. The billing will start from December and management has lowered its expectation of slippages to 5% from 7% earlier. NPL recoveries of Rs490mn are expected in ensuing quarters, and thus GNPL is estimated to remain around 0.6%. Stage-2 assets excl. restructured loans stood at ~Rs11bn (3.5% of loans)

NIM to stabilize after witnessing a significant decline in recent quarters

Incremental portfolio yield for the quarter was 9.02% (rack rate at 8.75%) and incremental CoF was 6.5%. No rate increase was taken in Q2 FY23 (rack rate was raised by 25 bps in June), but co. plans to hike rates in coming months to mitigate likely further increase in funding cost (CP & Bank Loans re-pricing). Can Fin had disbursed Rs52bn in H2 FY22 wherein discounts will get reinstated in H2 FY23. Management expects to sustain current Spread/NIM of 2.5%/3.5% in the near term.

Estimate avg 1.9% RoA/17% RoE over FY22-24

We reinstate BUY rating on Can Fin (had put the stock under review post the development of MD & CEO’s resignation) with a 12m PT of Rs640. We model a conservative disbursement/loan CAGR of 12%/16% over FY22-24 keeping a buffer for execution slippage/macro slowdown. Margins over longer run are expected to correct for continuously delivering above-industry growth. However, we still see Can Fin delivering avg 1.9% RoA/17% RoE over FY22-24 with an earnings CAGR of 18%. Investment risk-reward is attractive at current valuation of 1.7x FY24 P/ABV.

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