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PPoP miss but earnings beat led by provision write-backs

CIFC reported 4QFY22 PAT of INR6.9b (13% beat), up 184% YoY. While there was a margin compression of ~30bp QoQ and CIR was elevated at ~42%, the earnings beat was driven by provision write-backs of INR174m.

NII was flat QoQ at INR13.68b (4% miss) driven by interest income reversals of ~INR550m on the write-offs taken during the quarter. This also led to core spreads declining 40bp QoQ to 7.2%  Calculated write-offs stood at ~INR5.5b.

CIFC, in our view, is the best play among the asset financiers. Because of its presence in vehicle financing, LAP and home loans, CIFC has been able to deliver sustained healthy growth in disbursements by strategically going under-weight/over-weight product segments. Second wave of the pandemic had exacerbated the asset quality stress for Vehicle/LAP financiers but CIFC has yet again demonstrated its ability to recover from that stress with lower write-offs (v/s peers).

Recent foray into SME and Consumer Lending ecosystem opens up exciting new possibilities. We have a very positive outlook on the stock.

Strong disbursements growth; AUM up 6% QoQ

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

AUM grew 6% QoQ/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 provisions for write-off

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

S2 + S3 (30+ dpd) declined ~425bp QoQ to 12% (including the restructured pool).

GNPA and NNPA (IRACP) declined 170bp/90bp QoQ to 6.8% and 4.9%, respectively. CIFC has INR56b higher provisions under IND-AS over IRACP.

CIFC utilized ~INR3.4b of COVID provisions in 4QFY22 and the total management outlay stood at INR5b (~65bp of gross loans) as on Mar'22.

Liquidity position was very comfortable with INR53b of cash and cash equivalents and ~INR80b of undrawn sanctioned lines. Interestingly, the company has reduced the excess liquidity on the balance sheet

Valuation and view

Vulnerable asset pool Stage 2 + Stage 3 declined ~425bp QoQ to 12%. Improvement in this 30+ dpd seems to suggest that collections have been improving and will sustain in FY23 as well. CIFC has always exhibited conservatism in provisioning and it now carries ECL/EAD of 3.0% (v/s 1.85% preCOVID) which includes management outlay (~65p of gross loans). The important aspect to understand will be the demand outlook of CIFC in both new and used vehicles and its strategy for the newer product segments in the SME and Consumer ecosystems. We will look to revise our estimates after the earnings call on 6th May’22.

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