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Near-term headwinds; long-term growth story still intact

* Despite in-line NII, CIFC reported lower-than-expected PAT of Rs2.4bn (-40.5% qoq, +470% yoy) in Q4FY21 due to elevated employee charges (+68.2% yoy, +74.5% qoq) and additional management overlay of Rs3.5bn. These expenses were exceptional and related to the ongoing pandemic, and they would not affect future earnings.

* The company reported normalcy in disbursements (+43% yoy to Rs80.7bn). Though we expect some disruption in growth in Q1FY22 amid fresh lockdowns, it would be compensated by growth acceleration in H2FY22. CIFC continues to hold strong liquidity position with Rs64.3bn, considering recent uncertainties.

* On asset quality, Stage 3 assets inched up to ~3.96% vs. ~3.75% last quarter; however, the overall coverage improved to ~44.3%. The company has invested heavily in the collection mechanism in the past year, which should improve recoveries when things stabilize. Management overlay of Rs11bn (~1.4% of AUM) provides further comfort.

* We raise our earnings and Adj. BV estimates by ~6.7% and 2.2%, respectively, for FY23 and introduce FY24 estimates. We maintain Buy (OW in EAP) with a revised TP of Rs650 (Rs598 previously) at ~3.7x P/Mar’23E ABV (~3.5x earlier). We expect the company to deliver +20% RoEs (for the first time) in coming years, leading to multiple expansion.

What we like about CIFC results

* We continue to like CIFC due to its best-in-class underwriting practices, sufficient liquidity buffer to support growth and robust collection mechanism.

* Disbursement momentum remained healthy at Rs80.7bn (+43% yoy, flat sequentially) during Q4FY21. FY21 disbursements were at Rs260.4bn (-10% yoy) due to sluggish H1FY21 (H1FY21 disbursements stood at Rs100.5bn).

* The company holds Covid-19-related management overlay of Rs11bn (~1.4% of AUM), which provides further comfort. This is in addition to regular provisions of Rs13.4bn (1.76% of AUM).

Where we remain concerned

* Asset quality trends are expected to remain volatile due to lockdowns amid the second wave of Covid-19. However, we remain confident that CIFC management can handle such volatility.

* Opex surged ~27.9% yoy (+39.3% qoq) in Q4FY21 due to high employee charges, resulting in a spike in Cost to Average Assets to ~3%.

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