Buy Can Fin Homes Limited For the Target Rs.985 Axis Securities Ltd.
Consolidation Phase Ending; Growth Outlook Turning Constructive!
Est. Vs. Actual for Q2FY26: NII – BEAT; PPOP – BEAT; PAT – BEAT
Changes in Estimates post Q2FY26
FY26E/FY27E/FY28E (%): NII +5.4/+4.1/+4.3; PPOP +4.7/+2.9/+3.8; PAT +4.0/+1.2/+2.2
Recommendation Rationale
* Key States Showing Signs of Recovery: CANF’s key states – Karnataka (KA, owing to eKhata issue) and Telangana (TL) have reported muted growth. However, the company is seeing signs of revival, particularly in KA. The management has indicated that the KA government has announced certain measures regarding eKhata, which are directionally positive and should support growth revival in the state. Thus, the management expects the monthly disbursement run-rate in KA to improve from Q3 onwards and scale up to a Rs 300 Cr/month disbursement run-rate in Q4 vs the current monthly run-rate of Rs 260 Cr. On the other hand, TL normalisation will take another couple of quarters (expected to normalise from Q4). On the brighter side, the pace of negative growth in the TL portfolio is on a declining trend. CANF is also adopting a cautious approach in TL and not looking to accelerate growth momentum, citing higher delinquencies in the state. The current disbursement run-rate in TL currently stands at Rs 100 Cr/month and is expected to improve to Rs 120 Cr/month by Q4.
* Growth Momentum on an Upward Trajectory: Beyond the key geographies, CANF continues to see strong growth in the Eastern and Northern States at upwards of 30%, while TN and Western states have been delivering strong growth of 25%. CANF expects to improve the share of non-South states to 40% by FY28 vs 68% currently. A bulk of the network additions is in the West and North region. With the IT transformation underway, the management expects Q3 disbursement to be soft at ~Rs 2,500 Cr vs its earlier expectations of ~Rs 2,800 Cr. However, CANF remains confident of recouping growth in Q4 and has maintained its disbursement guidance of Rs 10,500 Cr for FY26. This should translate into AUM growth of 12-13%. With the company investing in feet on street to boost direct sourcing, along with continued branch network expansion and IT transformation boosting efficiency, CANF expects to accelerate AUM growth to 15% over FY27/28E
* Asset Quality Pristine; Credit Costs Under Control: In Q2, total delinquencies continued to decline QoQ. The company expects delinquencies to trend downwards going into Q3FY26. Thus, credit costs are expected to remain benign in the near term. The management expects CANF to contain its FY26 credit costs at ~15 bps (+/-5bps) or marginally lower, within its guided range.
* Sector Outlook: Positive
Company Outlook: With challenges in the core states of KA and TL gradually waning, the visibility on growth has improved. The branch additions and strengthening of its sales team should provide further impetus to growth through the direct sourcing channel. CANF has spelt out its growth path for FY28, with the company looking to improve the mix of non-home loans in the product mix to 20% vs 15% currently. Similarly, the mix of SENP customers is expected to improve to 35% vs 30% currently. We expect this could help CANF support NIMs, given the yields in the SENP portfolio are higher vs salaried. We believe CANF remains well-positioned to resume its growth trajectory from Q4 onwards. We expect RoA/RoE delivery of 2.2-2.3%/16-18% over FY27-28E, driven by (i) Improved growth visibility, (ii) Healthy NIM profile and (iii) Controlled credit costs backed by stable Asset quality.
Current Valuation: 1.9x FY27E BV; Earlier Valuation: 1.8x FY27E BV
Current TP: Rs 985/share; Earlier TP: Rs 925/share
Recommendation: We maintain our BUY recommendation on the stock
Financial Performance:
Operational Performance: CANF’s disbursements growth improved QoQ, growing at 26% sequentially, though it remained muted YoY (-2% YoY). AUM growth was marginally lower than our expectations at 8/2% YoY/QoQ. AUM growth was mainly driven by the SENP segment, which grew by 13/5% YoY/QoQ (in-line with management guidance of growing the SENP segment to support yields/NIMs), while the salaried segment grew by 6/1% YoY/QoQ. The share of Salaried to SENP borrowers stood at 70:30, flat QoQ.
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SEBI Registration number is INZ000161633
