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The momentum continues

Growth trajectory healthy; asset quality performance impressive

* Contrary to our expectations, CIFC has seen a quick turnaround in terms of both growth and asset quality. Disbursement performance has been superior v/s peers, while collection efficiency (CE) has consistently been 100%+ for the past few months. Macro indicators, such as e-way bills, also point to a strong recovery.

* The company’s strategy to focus less on low-yielding products (such as HCV Financing) compared with high-yielding ones (such as Tractor Finance) has been fruitful. With the cost of funds continuing to decline, coupled with the trimming of excess balance sheet liquidity, margins are poised to expand further going forward.

* Over the past five years, CIFC’s AUM has grown at a 19% CAGR, while RoE has improved from 16% to 20% (adjusted for one-off COVID provisions in FY20). The company is well-diversified across product segments as well as geographies. Asset quality is the best among peers under our coverage. The impact of COVID-19 is now behind us, and the provisions made by the company would suffice for any reasonable increase in GNPLs. While the stock has re-rated over the past few months, it trades close to its five-year average. Given CIFC’s strong RoE and growth potential, we believe there is scope for a further re-rating. Buy, with TP of INR640 (3.6x FY23E BVPS).

Growth back at pre-COVID levels

Compared with peers, CIFC was the quickest to get back on its feet in terms of disbursements post the pandemic. Despite the washout in the first quarter, disbursements were down only 25% YoY in 9MFY21 (in the Vehicle Finance segment) vis-à-vis 45–50% for peers. With OEM sales continuing to recover in 4QFY21, coupled with the low base effect, the company would continue to deliver above-average disbursement growth over the foreseeable future. While we expect AUM growth to decline to 10% YoY in FY22 (due to a higher repayment rate), it should improve to the mid-teen levels FY23 onwards.

Product diversification margin-accretive

A clear strategy the company has followed, even before the COVID outbreak, is to diversify away from the new HCV Financing segment (given elevated competition from banks and low yields) and to other segments such as Used CVs and Tractors. The share of HCVs in the AUM mix has declined from ~20% to 10% over the past two years, while that in disbursements has declined from ~15% to 2–3% over this period. While this has led to slower growth for CIFC, it has helped improve overall yields and return ratios. On the other hand, it has become a meaningful player in Tractor Financing. With disbursements more than doubling over the past three years, CIFC’s disbursements in 9MFY21 were 15–20% below that of MMFS and ~30% below that of LTFH. Note that yields in Tractor Finance are 500– 600bp higher than in HCV Finance.

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