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Soft quarter, execution on guidance key

Can Fin delivered a miss versus our expectation on disbursements, margins, and credit cost. Disbursements were moderate at Rs18.5bn (-20% qoq/-6% yoy), causing further deceleration in loan book growth (up 1.6% qoq/9.4% yoy). Disbursement volume was impacted by elections and transient issues in key markets of TL and AP. The Spread/NIM contracted by 13 bps/16 bps on sequential basis with CoF rising by 18 bps on account of 1) material increase in share of NCD borrowings over past 2Qs, 2) full-quarter impact of higher-rate CP borrowings during March and 3) further decline in share of low-cost NHB borrowings. Opex was significantly lower versus Q4 FY24 due to absence of one-off/non-recurring cost (Rs80-90mn), much lower disbursements (80% loans via DSAs) and the usual seasonality in employee cost. 1+ dpd increased by 11% on sequential basis with SMA pool swelling by 10.5% and GNPLs rising by 14%. Such increase in NPLs in the first quarter has been a trend with Can Fin. Credit cost was higher at Rs245mn (ann. 28 bps) owing to significant increase in delinquent pool. There was no write-off in the quarter, neither there was any utilization of management overlay (Rs340mn). RoA/RoE for the quarter stood at 2.2%/17.5%.

Retains growth, spread and credit cost guidance without factoring any benefits from Govt’s likely Affordable Housing push

With pick-up seen in disbursements in June-July and recovering business momentum in TL and AP, the Management has retained full-year disbursement target of Rs105bn and loan growth projection of 15% (basis current portfolio run-off trend). In Q2 FY25 itself the originations are estimated to be Rs25bn. Medium-to-longer term growth drivers would be 1) improving productivity of branch sales team, 2) addition of 15-16 branches, 3) development of non-DSA channels (APF, Digital Aggregators, etc.), 4) efficiencies from moving to 3-tier operating structure, 5) increase in HL ATS with higher focus on Rs3-7.5mn loan segment and 6) emphasis on growing LAP at a faster rate.

Cost of Funds is unlikely to increase meaningfully further due to 1) downward repricing of CP stock (7% of total borrowings), 2) 40-45% of Bank Borrowings linked to Repo/EBLR, and 3) likelihood of availing NHB funding at lower blended rate. Management continues to expect Spread/NIM for the year to be at 2.5%/3.5%. With expectation of substantial reversal/roll-back/recovery of the increased SMA pool and GNPLs, Can Fin estimates credit cost for the year at 12-13 bps.

Notably, the guidance on growth and margins does not factor any benefit that may accrue from the widely expected initiatives by the Government to boost affordable housing. Interest subsidy/subvention scheme like erstwhile CLSS would provide fillip to Can Fin’s growth (eligible loan accounts were 20%+ of disbursements during FY21-23). Increase in budgetary allocation for NHB under AHF scheme and Refinance program would improve the funding cost and support margins of the company.

Growth execution on guidance key; retain BUY with 12m PT of Rs1000

There is negligible change in our FY25/26 earnings estimates though we have calibrated disbursement growth for the current year. However, growth delivery/execution in line with guidance would be key to hold or rerate valuations. Also important will be Government initiatives to boost affordable housing and benefit that could accrue to the company. Aided by strong balance sheet quality and funding franchise, Can Fin has delivered avg. RoE of 18-19% over the past 10 years with much lesser variability.

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