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A decisive improvement in growth commentary    

Can We retain BUY on Can Fin and raise 12m PT to Rs615, following the introduction of FY23 estimates. While the Q3 results were a beat, the management commentary pertaining to growth decidedly turned positive. The confidence on growth comes from multiple factors viz. a) robust disbursements in December despite partial impact of Telangana registration issue (now resolved), b) a strategic reduction in loan pricing (now in‐line with competition) which has arrested BT Out, increased BT In and substantially expanded market for fresh disbursements and c) a strong pick‐up in housing demand in affordable and lower‐middle segments (target for Can Fin) witnessed across most regions. Management has guided towards achieving steady 16‐18% disbursement and portfolio growth in 6‐8 quarters.

Though the current pricing strategy would correct margin and spreads in ensuing quarters (guidance of sustainable NIM/Spread of 3%+/2.3%), the hit at the RoA level will cushioned by normalization of credit cost. The SC stand‐still is at 30 bps of loan book and restructuring is at 45 bps, while the additional provisions are at 45 bps. The collection efficiency has attained pre‐Covid level of 93%. We estimate growth rebounding to 13‐14% in FY22 after a delivery of 5% in the current fiscal. RoA will come‐off a little on margin reduction, while RoE will be constricted by stable leverage. We have not factored capital raise as its timing remains difficult to predict. Current valuation at 1.9x FY23 P/ABV is amenable to re‐rating with improvement in growth prospects

Management Commentary

Disbursements, BT and Portfolio Growth  

* Disbursements in Q3 FY21 were impacted by registration issues in Telangana which contributed 20% of incremental business in earlier quarters – otherwise disbursements would have been at par with Q3 FY20.

* As a strategy focused on collection and asset quality in the past few quarters  ‐  Now the focus has shifted back to business growth – with Telangana issue resolved, Q4 FY21 should see reversion towards normal growth.  

* In next 6‐8 quarters, loan and disbursement growth could reach 16‐18%.  

* Strategically changed pricing strategy to retain book and push growth ‐ generally kept pricing 100‐150 bps higher than Banks and large HFCs, but now pricing loans at similar rates (starting rate 6.95%) – have seen significant improvement in customer retention (reduction in BT Out).

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