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In sweet spot; continued growth to drive valuation…

About the stock: CanFin Homes (CFHL) was promoted by Canara Bank in 1987, with ~30% stake as of September 2022. The HFC is spread across 204 locations across 21 states and UTs with south contributing ~72% of loans and focus on tier II & III cities. Most borrowers are first time home buyers with average age of 35 years.

* Housing loans comprise ~90% of advances of which ~74% is to salaried customers

* The company caters to customers in the mid & affordable segment with average ticket size being | 22 lakh for housing and | 8 lakh for non-housing loans

Key triggers for future price performance:

* Rising demand for own house, improved affordability, government support (PMAY) and low mortgage penetration in India remain catalysts for sustainable growth in the housing finance segment.

* CFHL’s focus on non-metro cities (predominantly tier II & III cities) with relatively lower competitive pressure and well defined process oriented credit disbursement is seen aiding business growth with low risk volatility

* The management’s comment in the recent past with increasing proportion of LAP to further support AUM and NIM trajectory

* Strong parentage and consistent superior asset quality enables it to keep cost of funds lower & leverage higher, thus enabling better margins & RoE

* Stringent cost control with CI ratio at 16-17% ensures continued focus on maximising productivity, which, in turn, would benefit earnings trajectory

* Exhibited superior asset quality in the past. Focus on salaried segment & strong underwriting practices enable it to maintain steady asset quality

* The management has clearly articulated that recent concerns regarding fraudulent accounts has been addressed with no further surprise anticipated

* Healthy performance continued under the interim leadership. Identification of new MD & CEO (preferably from the private sector) is in advanced stage

What should investors do?

Consistent business growth with focus on efficient operations coupled with relatively lower cost and strong underwriting to benefit earnings and return ratios. Anticipated healthy earnings growth at 17% CAGR in FY22-25E and RoA at ~1.8-1.9% are expected to drive valuations.

* We initiate coverage on the stock with a BUY recommendation

Target Price & Valuation: We value CFHL at ~1.8x P/ABV FY25E to arrive at a target price of | 625 per share.

Alternate Stock Idea: Apart from CFHL, we like HDFC Ltd in the housing space.

* HDFC Ltd is the largest NBFC engaged in housing finance business. It has demonstrated consistent performance in growth as well as asset quality

* BUY with a target price of | 2850

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