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Operationally strong quarter

Can Fin delivered an operationally strong performance in Q4 FY23 that was characterized by healthy loan assets growth (up 4.8% qoq/18% yoy), material improvement in lending spread (+24 bps on stock basis and +12 bps on marginal basis) and further improvement in asset quality (4% qoq decline in GNPLs and stable Stage-2 assets). BT Out, which had moderated in the preceding quarters, remained at non- perturbing level. Co. utilized its strong PPOP performance to buffer standard assets provisions, which drove higher-than-expected credit cost.

Enthusing management commentary

Management remains sanguine about growth, margins and credit cost in FY24. Can Fin expects to deliver 18-20% disbursements and loan portfolio growth without (not required) any material changes in focus segments, distribution strategy and operational
policies. Co.’s pricing for fresh loans is 50-100 bps higher than larger HFCs and Banks, implying a competitive market positioning. With nearly 50% of portfolio to witness upward repricing over the next 6-8 months and liability repricing cycle largely behind,
the spread and margin are set to improve. Credit cost is estimated near 8-10 bps with solid traction in NPL recoveries and modest forward flows. In earlier interactions, the co. had shared a benign assessment on slippages from the restructured book (2.3% of loans).

Raise earnings and price target materially; remains a Top Pick Positive changes in NIM and credit cost assumptions drive 10-11% upgrade in FY24/25 earnings estimates. We expect Can Fin to deliver avg. 2% RoA and 18% RoE over FY23- 25. Notably, we have built slightly lower growth and margin and marginally higher credit cost than managements’ guidance. With more stable and stronger RoEs across cycles, growth convergence with affordable HFCs can significantly re-rate Can Fin’s valuation. The stock is trading at 1.6x FY25 P/ABV. We maintain high conviction BUY with upgraded 12m PT of Rs760.

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