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Growth and margin picture becomes clearer; valuation attractive

Can Fin delivered a strong package of performance in Q3 FY22 that featured acceleration of growth (up 6% qoq/20% yoy), improvement in NIM (versus concerns over stability) and reduction in NPLs to pre‐pandemic level (no impact of RBI circular). Persistent beat on disbursements (Rs24.7bn v/s Rs22bn in Q2 FY22 and Rs14‐15bn before Covid) and controlled BT Out (Rs300mn monthly, despite disbursement yield higher than peers) have been driving significant portfolio expansion amid continual uptrend in demand across key markets and normalization of competition from banks in lower ticket segments. Management has guided for even higher originations in Q4 FY22 (basis little business impact of 3rd wave thus far) and 18‐20% growth in loan book for coming years.

Portfolio spread improved by 7 bps qoq to 2.5%, driven solely by increase in portfolio yield (aided by the hike in rack rate since April). NIM for the quarter improved to 3.65% from 3.54% in Q2 FY22, and the co. believes that it could be maintained in ensuing quarters with further uptick in portfolio yield. Besides the flexibility to raise rates, annual re‐pricing of back book (positive in a rising rate environment), pricing change due to movement in risk rating and reversal of rate discounts after first year would protect NIMs. Management does not envisage any major change in borrowing mix (CPs at 15%) over the medium term. With collection efficiency, better than pre‐Covid level, negligible impact from RBI circular, likely continuance of NPL recoveries and assessment of low slippages (7‐10%) from OTR pool, the credit cost is estimated to remain modest. 

In our view, Can Fin’s Q3 FY22 performance provides clarity on growth and margin trajectory. Our recent branch visits had revealed no material compromise on the quality of new business (in terms of credit score, occupation mix and sourcing mix) notwithstanding co.’s higher HL rates. Return of growth and preservation of strong profitability should re‐rate valuation (stock trades at 1.9x FY24 P/ABV). Current 1‐yr rolling fwd. P/ABV multiple stands well below the 5‐year average.

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