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Structural transformation to aid long term performance

About the stock: CanFin Homes (CFHL) was promoted by Canara Bank in 1987, with ~30% stake as of June 2023. The HFC is spread across 205 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 ? 22-24 lakh for housing and ? 8 lakh for non-housing loans

Investment Rationale

• Geographic expansion & increase in ticket size to aid business growth: CFHL has delivered consistent performance on growth and earnings along with prudent asset quality. Expect loan growth to continue at healthy pace of 17-18% CAGR in FY24-25E, driven by branch expansion (15 branches in FY24E), increase in ticket size (currently at ?22 lakhs) & diversification in channel including “Approved project file”.

• Revamping of processes & IT transformation to enable faster turnaround: Strategy to revamp process & implement technology, while preserving existing advantages, to result in faster turnaround with improvement in efficiency. Expect transformation to result in elevated cost to income ratio at ~17.5-18% in FY24-25E, post which efficiency is expected to kick in as business momentum starts gaining pace.

• Repricing of liabilities largely done; NIM to remain stable: CFHL has remained of lower cost of funds attributable to factors including parentage, diversified source of funding, strong credit rating and sustained repayment track record. Cost of funds expected to remain steady led while repricing of assets to gradually to pan out till Dec’23, expect margins at ~3.3-3.4% and spreads at 2.4-2.5% in FY24-25E.

• Strengthening of risk management keeping core advantage intact to aid asset quality: CFHL has managed to keep GNPA at <1% during various cycles and Covid-19 was no exception. Restructured book was at ? 690 crore (~2.2% of total loans) with ?67 crore of provision and overlay provision of ? 17 crore. Expect GNPA ratio at 0.6- 0.7% in FY24-25E with credit cost being largely steady

Rating and Target price

• CFHL has been best in class HFC player with a robust business model & underwriting practices, which resulted in healthy earnings growth with GNPA <1% across cycles. Strategy adopted by new management to strengthen processes & IT infrastructure to further aid business growth and RoA.

• At the CMP, CFHL trades at ~1.9x FY25E ABV, which seems a good opportunity given its fundamental strength and historical valuation. Hence, we assign a BUY rating with a target price of ? 935/share.

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