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Sectoral tailwinds to accelerate growth

Demand outlook healthy; asset quality will exhibit steady improvement

* Despite cyclicality in the vehicle finance business, CIFC is slowly but steadily morphing into an enviable franchise by diversifying into newer product segments, scaling up its LAP (Loan against property) segment, and further strengthening its liability franchise. Notably, CIFC is highly focused on improving the underlying asset quality, which was adversely impacted during the pandemic.

* We believe sectoral tailwinds in vehicle finance will sustain at least over the next 12-18 months, aiding the disbursement momentum in the near-term. Over the medium term, we believe that CIFC would have sufficiently strengthened its LAP, Home Loans, and the three newer business segments— Consumer & Small Enterprise Loan (CSEL), Secured Business & Personal Loan (SBPL) and Small & Medium Enterprises (SME)—to start reaping the benefits of diversification and mitigate the effects of cyclicality on its core Vehicle Finance business.

* A deeper understanding on the approach undertaken by CIFC to build these three new businesses has led us to believe that the company may not repeat the follies from a decade back when it forayed into consumer finance in a JV with DBS Bank.

* FY23, in all likelihood, is expected to be a blockbuster of a year for the multiproduct vehicle financiers in general and CIFC in particular. The loan disbursements trends in 1HFY23 (reported in 1Q and based on our channel checks in 2Q) indicate that CIFC can deliver a 74%/30% YoY growth in FY23 disbursements/AUM. We continue to maintain a conservative stance on our estimates for both loan disbursements and repayments (to guard against a volatile macro environment) but we acknowledge upside risks to our FY23 disbursements/AUM growth estimates.

* In a rising interest rate environment, margin compression for vehicle financiers such as CIFC is imminent. Although we estimate a margin compression of ~40bp/30bp in FY23/FY24E, respectively, CIFC can pull the levers on its credit costs in FY23 and opex from FY24 onwards, to continue delivering a healthy RoA/RoE.

* CIFC is well-diversified across product segments as well as geographies. Importantly, it has delivered the best asset quality among peers across the various phases of the credit cycle. We estimate AUM and PAT CAGR of 24% and 20%, respectively, over FY22-FY25E. The stock trades at 3.5x FY24E P/BV, above its 10-year average of 2.7x. Given CIFC’s ability to deliver industry-leading growth in the loan book – coupled with its strong asset quality (expected average credit cost of ~1.1% over FY23–25E) and consequently a healthy RoE of ~21-22% – we believe it would continue to command premium valuations in the sector. We reiterate our Buy rating with a TP of INR925 (4.0x Sep’24E BVPS).

* Key Risks a) CIFC is expected to predominantly remain a vehicle financier (contributing ~60% of the loan mix by FY25E), and will therefore, remain vulnerable to the cyclicality inherent in vehicle financing b) Asset quality of the newer business segments where it is rapidly scaling up will be known only when there is sufficient scale and seasoning of the respective product segments.

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