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Well equipped to manage the interest rate up-cycle; build-out of newer businesses will be key

CIFC reported a sequentially weak PPOP in 4QFY22, led by interest income reversals of INR0.5b and an elevated cost ratio of 3.5% (v/s 3.9% YoY), while PAT rose by ~180%YoY aided by provision write-backs. AUM and disbursements grew 10%/36% YoY in FY22. While we model in a margin compression, we recognize that it has levers on OPEX and credit costs to deliver a healthy RoA/RoE of 2.7%/19% in FY24E. We firmly believe that CIFC will be able to scale-up its capabilities in newer businesses and carve out its ‘Right to Win’ in these segments. We maintain our Buy rating with a TP of INR810 per share (4x FY24E BVPS)

Strong growth in disbursements; AUM up 6% QoQ

Disbursements were strong at ~INR127b and grew 22% QoQ and 58% YoY. Newer product lines contributed 12% to the disbursement mix in 4QFY22. A large proportion of this was from SME and CSEL segments.

AUM grew 6% QoQ and 10% YoY to INR769b. Within Vehicle Finance, 3Ws continued to decline with a 6% QoQ drop in AUM, while Tractors/HCV/mini LCVs were flat sequentially

Asset quality improved sequentially; utilization of COVID-19 provisions for write-offs

GS3/NS3 improved by 150bp/90bp QoQ to 4.4%/2.6%. PCR on S3 improved by ~80bp QoQ to ~40%. Improvement in GS3 was seen across all product segments. ECL/EAD also declined by 100bp QoQ to ~3%.

30+ dpd declined by ~425bp QoQ to 12%, including restructured pool.

GNPA and NNPA (IRACP) declined by 170bp/90bp QoQ to 6.8%/4.9%. It carries INR56b in higher provisions under Ind AS compared to IRACP.

Strong momentum in newer businesses, expect CIFC to calibrate the growth basis experience on asset quality

While we acknowledge that CIFC does not yet have a clear ‘Right to Win’ in newer businesses, we believe it is equipped to build-out capabilities in these product segments. While the momentum witnessed was indeed strong in 4QFY22, we believe that the company will calibrate its growth basis experience on asset quality.

Credit costs in new product segments will be higher than Vehicle/LAP. We expect RoA from this segment to be either equal or marginally higher than existing product segments, which will be accretive to overall RoA/RoE.

Key highlights from the management commentary

CIFC will protect RoTA by leveraging its diversified product mix. The management internally targets 3.5% and expects it to be in 3.5-3.9% range.

Newer businesses have currently gone live in 15-20% branch locations and will be scaled to 70% of branches by Mar’22. It expects an improvement in new business disbursements going forward.

Reiterate our confidence in the CIFC franchise; maintain Buy

The second COVID wave exacerbated the asset quality stress for Vehicle/LAP financiers, but CIFC has once again demonstrated its ability to recover from that stress, with lower write-offs (v/s its peers).

We model in ~21%/20%/16% disbursement/AUM/PAT CAGR over FY22-24. We have cut our FY23/FY24 earnings estimate by 6%/4% to factor in higher OPEX and provisions, and build in a RoE/RoA of 19%/2.7%. Strong asset quality has been CIFC’s hallmark. It has in the past delivered benign credit costs relative to its peers. We maintain our Buy rating with a TP of INR810 per share (premised on 4x FY24E BV).

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