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Next leg of re-rating will be driven by the new management

CANF’s 2QFY23 results reiterated that all the noise around asset quality/fraudulent accounts over the last two quarters have been addressed and there will be no unpleasant surprises as the current CEO Mr. Girish Kousgi steps down. Disbursements have gathered pace and we expect the momentum to sustain in the subsequent quarters. The only thing we would closely monitor is its impact on margins, wherein we estimate NIM compression of ~15bp YoY in FY24E. We model an AUM/disbursement CAGR of 17%/10% over FY22-24. Given that we do not expect any new negative developments in asset quality, we now estimate FY23 credit costs of ~16bp (v/s ~20bp earlier). Valuations can get re-rated to 2.0x P/BV, if the new (to-be appointed) management team (of MD & CEO/CFO/CRO) gains the investor confidence that CANF can continue delivering the same strong loan growth and pristine asset quality as it has been exhibiting under the leadership of the outgoing CEO. We reiterate our Buy rating.

Operating profits in line; PAT below estimate due to higher credit costs

* Can Fin Homes (CANF)’s 2QFY23 PAT grew 15% YoY but declined 13% QoQ to INR1.4b (8% miss), led by higher-than-estimated credit costs. PPoP was largely stable QoQ and up 33% YoY to ~INR2.2b (in-line).

* GNPA improved ~3bp sequentially to 0.62%, while NNPA increased ~5bp QoQ to 0.35% with PCR declining ~110bp QoQ to ~43%. Credit costs stood at INR132m (v/s MOFSLe INR100m). Decline in PCR was driven by transition to ECL-based provisioning norms.

* Bank borrowings increased to 54% (from 50% a year ago), while the share of CPs declined sequentially ~300bp to 8%. We expect the healthy trajectory of loan growth and asset quality to sustain while margins remain a key monitorable.

Healthy growth in advances

* Disbursements grew ~2% YoY to INR22.45b, while there was a sequential increase of ~INR5.2b in absolute quantum of disbursements.

* Advances grew 22% YoY/5% QoQ to INR288b. The run-off in the loan-book was meaningfully lower than expectations, suggesting that CANF was highly successful in stemming balance transfers during the quarter.

Margin declines sequentially; share of bank borrowings stable QoQ

* NIM (calc.) declined ~5bp sequentially to ~3.55% in 2QFY23.

* Reported spreads declined ~15bp QoQ to ~2.5%. This was predominantly because of the higher CoF, which increased ~25bp QoQ to ~6% even as yields improved ~10bp QoQ to 8.55%.

* CANF replaced CPs (down 3pp QoQ) with NCDs (up 3pp QoQ), while the bank term loans remained stable sequentially.

Highlights from the management commentary

* While the management guided for margins and spreads of 3.5% and 2.5% over the next few quarters, in the medium term, it expects 3.0% and 2.4%, respectively.

* Shared that the hiring process of the new MD&CEO has started and that it expects the new MD/CEO to assume office within the next 2-3 months. Likewise, CANF will also be looking to onboard a new CFO and CRO, suggesting that a completely new senior leadership team will assume office at the company within the next few months.

Valuation and view

* We model in a NII/PPOP/PAT CAGR of 18%/19%/18% over FY22-24 for an RoA of 1.9%/1.8% and RoE of 17.6%/16.7% over FY23/24, respectively.

* CANF is a franchise with moats on the liability side and strong asset quality. Its ability to maintain stable margins is a key monitorable as CANF continues on its healthy loan growth trajectory.

* The next leg of the re-rating in valuation multiple will be contingent on the appointment of the new management team and its ability to inspire investor confidence in loan growth and asset quality. We reiterate our Buy rating with a TP of INR610 (premised on 1.9x FY24E BVPS).

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