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Strong operational performance barring NIM compression

* CIFC’s PAT declined 7% YoY to INR5.6b while NII grew 17% YoY to INR14.9b in 2QFY23. PPoP rose 18% YoY to INR10.4b. NIM contracted ~35bp YoY and ~45bp QoQ in 2QFY23 led by a sharp ~70bp QoQ increase in the CoB.

* GS3/NS3 improved 30bp/20bp QoQ to 3.8%/2.3%, respectively, and PCR on S3 improved ~80bp QoQ to ~41.5%.

* For 1HFY23, RoE moderated to 18.3% (PY: 18.7%). Disbursement momentum continued to remain strong and grew 126% YoY to INR279.5b in 1HFY23.

* Newer businesses contributed ~21% to the disbursement mix in 2QFY23. Newer businesses spawned by CIFC, will exhibit an improving disbursement run-rate and will contribute ~10% to the AUM mix by FY24E. These will potentially drive RoA improvement.

* We model disbursement/AUM/PAT CAGR of 32%/23%/19% over FY22-FY25, respectively. We cut our FY23E/FY24E EPS by ~3% each to factor in the margin compression and higher opex ratio. While we estimate a margin compression of ~60bp/20bp in FY23/FY24, respectively, we reiterate that it has levers on credit costs and business AUM growth to deliver a healthy RoA/RoE profile of 2.7%/20% over FY23-FY24. Maintain BUY with a TP of INR910 (based on 4.0x Sep’24 BVPS).

Strong disbursements lead to 25% YoY AUM growth

* CIFC’s business AUM grew 7% QoQ/25% YoY to INR877b. Within vehicle finance, MUV/Cars/LCV/CE/2W registered a sequential growth of 8%/6% /6%/3%/10%, respectively.

* Disbursements in 2QFY23 surged 68% YoY/10% QoQ to ~INR146b. The diversified product mix and growth in LAP, HL and newer businesses supported the healthy disbursements

Magnitude of margin compression in 2HFY23 the key monitorable

* A sharp ~70bp sequential increase in CoF led to NIM compression of ~35bp in 2QFY23. CIFC guided that the CoF will increase ~50-55bp YoY in FY23.

* CIFC has effected interest rate increase of ~40bp each in Home Loans (HL) and LAP in 1Q/2Q/3QFY23. In HL and LAP, as and when the PLR is increased, it is immediately passed on as increase in tenor or EMI. This we believe would aid minor improvement in yields in 2HFY23.

* Opex remained elevated with cost-to-income ratio at 39%. Elevated opex was led by investments in newer businesses and gradual build-up of the DST (on-roll sales employees) to reduce the dependence on DSA origination in CSEL and SME. Management guided for cost-to-average assets of ~3.0%.

Asset quality improves driven by LAP while VF and HL are stable

* GNPA and NNPA (RBI IRAC) declined ~45bp each QoQ to 5.8% and 4.0%, respectively. Management overlay was maintained at INR5.28b (~60bp of business AUM) and CIFC plans to utilize the same over subsequent quarters.

* LAP GS3 declined ~50bp QoQ while GS3 improved ~7-8bp each in both Vehicle Finance and Home Loans. ECL/EAD declined ~20bp QoQ to ~2.7%.

* There was a sequential improvement in both Stage 2 and Stage 3 with the 30+dpd declining ~130bp QoQ to ~9.9%.

Key highlights from the management commentary

* Rabi is likely to be better than Kharif. Mining and infrastructure activities are expected to improve leading to an improvement in CV/CE demand. Passenger Vehicle demand is still very strong.

* In FY23, 35% volume growth is expected in Vehicles and the value growth will be even higher because of the rise in ticket sizes (from BS-IV to BS-VI transition).

* Newer businesses will churn out higher yields but it will also deliver higher opex and credit costs. Despite these, newer businesses will be RoTA-accretive.

* CIFC will seek equity capital when T1 declines below 13% (current T1 at 15.8%).

Valuation and view

* Vulnerable asset pool (Stage 2 + 3) declined ~130bp QoQ to 9.9%. Improvement in the 30+dpd pool seems to suggest that collections have been increasing and will sustain in 2HFY23 as well. CIFC has exhibited conservatism in provisioning and it now carries ECL/EAD of 2.7% (v/s 1.85% prior to COVID-19), which includes a management overlay of ~60bp.

* CIFC has exhibited its capabilities to scale up the newer businesses with their contribution to disbursement mix inching up to ~21% in 2QFY23. While the newer businesses will drive higher opex and credit costs, the higher yields from the same should lead to RoTA accretion. CIFC is a franchise equipped to deliver strong AUM growth and benign credit costs (relative to peers), translating into a sustainable RoE of ~20% across economic cycles.

* The stock trades at 3.6x FY24E P/BV. We believe there will be a further expansion in multiples once investors gain more confidence in its execution capability in newer product lines. CIFC is our top pick in the NBFC sector. Maintain BUY.

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