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Disbursements gained momentum; decline in the stressed asset pool

* CIFC reported a PAT of INR6.1b (5% beat) in 2QFY22, up 86% QoQ and 40% YoY on account of lower than anticipated credit costs (~35bp; multi-quarter low), but was partly negated by higher OPEX of INR5.2b (up 46% YoY and 40% QoQ).

* Core spreads declined by 15bp QoQ and 25bp YoY to 7.5%. Other income was up 29% QoQ, in line with the growth in disbursements.

* Asset quality improved with a decline of ~200bp QoQ in S2+S3 loans. Incremental restructuring of ~140bp in 2QFY22 was well within the management’s guidance. ECLGS disbursements in 2QFY22 were insignificant at INR250m.

* CIFC is the best play among asset financiers. Given its presence in Vehicle Financing, LAP, and Home loans, it has been able to deliver consistently healthy growth in disbursements by strategically going underweight/overweight on product segments. The second COVID wave has exacerbated the asset quality stress for Vehicle/LAP financiers, but CIFC’s ability to recover from that stress without significantly higher credit costs (write-offs) gives us confidence that this time will be no different.

* We expect a sustained recovery in disbursements in 2HFY22 and accordingly model ~11% AUM CAGR over FY21-24E. We upgrade our FY22E earnings by ~12% to factor in lower credit costs. Strong asset quality has been CIFC’s hallmark and it has in the past delivered benign credit costs relative to peers. We expect the company to deliver healthy RoE of ~19% over the next three years. We maintain our Buy rating on the stock with a TP of INR700/share (3.9x Sep’23E BV).

Healthy growth in disbursements; AUM up 3% QoQ

* Disbursements rose 35% YoY and 140% QoQ to ~INR87b. However, the texture of disbursements suggests that Vehicle demand continued to remain muted. Disbursements were propped up by heavy lifting by the LAP segment, which constituted 20% of disbursements (v/s 14-16% in the past).

* AUM rose 4% YoY and 3% QoQ to INR700b. Within Vehicle Finance, 3W and HCVs were the only product segments which exhibited a 10%/5% QoQ decline in AUM. All other product segments exhibited a 2-5% sequential growth.

Margin stable, liquidity position comfortable

* Yield (calculated) on loans declined by 22bp QoQ to 14.4%. The impact was slightly negated by a 9bp sequential drop in CoF. Core spreads declined by 15bp QoQ and 25bp YoY to 7.5%.

* NIM (on-book loans) were stable sequentially at 7.8%.  Liquidity position is comfortable with INR54b of cash and cash equivalents and INR44b of undrawn sanctioned lines.

Asset quality should exhibit steady improvements over 2HFY22E

* GS3/NS3 improved by 60bp/50bp QoQ to 6.2%/3.9%. PCR on S3 improved by ~95bp QoQ to 36.5%. Even GS2 moderated by 135bp QoQ to 12.7%. Stage 2 and 3 declined by ~200bp QoQ to 18.8% (including the restructured pool). Write-offs (including repo losses) stood at INR1.45b in 2QFY22.  Incremental restructuring stood ~140bp in 2QFY22. Aggregate restructured pool stood at INR47.5b (6.8% of AUM). ECLGS in 2QFY22 was insignificant at INR250m.

* There were no additional COVID-19 provisions in 2QFY22. Aggregate COVID-19 provisions stood at INR7b (~1% of AUM). The management said it will maintain INR2-3b of COVID-related provisions, and the rest will be utilized/reversed in subsequent quarters.

Key highlights from the management commentary

* LAP/Home disbursements will be growing faster than Vehicle. Since they are longer-tenor loans, the proportion of LAP/Home in AUM will increase.

* The management will start driving disbursements in 2HFY22 as collections are back to Mar'21 levels (after it was impacted by the second COVID wave).  In 2H, the management expects credit costs to trend at similar levels as 2QFY22, except if there are any new developments due to the third COVID wave.

Valuation and view

* CIFC has weathered the pandemic well. Its collection efforts resulted in relatively better asset quality without any large write-offs. Vulnerable asset pool (Stage 2 and 3) declined to ~19%, including ~6.8% of loans, which have been restructured. Collection efficiencies suggest that asset quality should exhibit significant improvement in the seasonally strong second half of the fiscal. CIFC has always been conservative in provisioning. We believe it has adequately provided, with an ECL/EAD of 4.1% (v/s 1.85% pre-COVID). This includes COVIDrelated provisions of ~1% of AUM.

* We expect a sustained recovery in disbursements in 2HFY22 and model AUM growth of 6%/12% in FY22E/FY23E. Strong asset quality has been CIFC’s hallmark and it has delivered benign credit costs relative to peers. We expect CIFC to deliver normalized credit costs of ~1% by FY24E. We estimate a 23% PAT CAGR over FY21-24E and RoE profile of 19% over the next three years. We maintain our Buy rating with a TP of INR700/share (3.9x Sep’23E BVPS).

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