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One-offs lead to PAT miss

* CIFC reported a 4QFY21 PAT of INR2.4b, 55% miss on higher-than-expected employee expenses and credit costs. The PAT miss belies the healthy onthe-ground operating performance.Disbursements/AUM grew 43%/16% YoY, while asset quality was stable.

* In FY21, CIFC delivered NII/PPOP/PAT growth of 32-44% YoY. It also increased its total provision buffer by 90bp to 3.6% in FY21.

Growth momentum picks up across the board

* While disbursements were largely flattish QoQ at INR81b, it was due to negligible ECLGS disbursements in 4QFY21 v/s INR15b in the preceding quarter. Disbursements were driven by all segments. We note the sharp uptick in HCV and CE disbursements to higher than pre-COVID levels.

* As a result, AUM grew 2% QoQ/16% YoY to INR700b.

Spreads down 50bp QoQ from record highs, yet healthy

* Yield on loans fell 80bp QoQ to 15.1%, partly driven by the INR350m interest reversal in 4QFY21 and some one-offs in the preceding quarter. Cost of funds fell 120bp YoY to 7.1%. As a result, spreads rose 90bp YoY, but fell 50bp QoQ to 8% in 4QFY21.

* Employee expenses increased 68% YoY led by incentive payments and salary hikes for FY21 being paid in 4Q.

Pro forma GNPL ratio stable; building a provision buffer

* Pro forma GNPL ratio increased 100bp QoQ to 3.8%. Stage 2 loans declined 20bp QoQ to 6.2%, despite classification of ~2% of restructured loans under Stage 2.

* CIFC shored up its Stage 1, 2 provisions by 40bp to 1.9% and its Stage 3 provisions by ~100bp to 44%.

Key highlights from the management commentary

* ECLGS disbursements in LAP stood at INR8b, and INR20b till date.

* Collection efficiency declined to 93% from 116% MoM in Apr’21.

Valuation and view

Over the past year, CIFC has weathered the pandemic well. Its collection efforts resulted in largely stable GNPLs without any large write-offs. On the business front, it gained market share across products. While disbursements would be muted in 1HFY22 due to the second COVID wave, we expect them to pick up thereafter. We expect overall AUM growth to pick up from high single-digits in FY22E to ~15% in FY23E.

We also increase our FY22E credit cost estimate to 1.7% from 1.1%, given the increasing lockdowns across states. We cut our EPS estimates by 7-19%. The company would deliver healthy (18-20%) RoE going forward. Its RoE is best-in-class in our coverage universe after Gold Financiers and BAF. Hence, we maintain our Buy rating on the stock with a TP of INR650/share (4x FY23E BVPS).

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