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Growth Momentum to Improve from FY26 Onwards!

Est. Vs. Actual for Q1FY26: NII – BEAT; PPOP – INLINE; PAT – BEAT

Changes in Estimates post Q1FY26

FY26E/FY27E (%): NII -0.7/-2.7; PPOP -1.7/-2.8; PAT -1.9/-3.1

Recommendation Rationale

* Key States Yet to Recover; Improvement Signs Visible: CANF’s key states – Karnataka (KA, owing to e-Khata issue) and Telangana (TL) continue to remain impacted, keeping growth muted. On the other hand, the North (+40% YoY), West (+15% YoY), and Tamil Nadu (+35% YoY) continued to drive disbursement growth for the company in Q1. The management expects some respite in the key states and growth momentum to resume from Q2 onwards. With growth visibility improvement in sight, CANF will aim at clocking disbursements of Rs 2,500+ Cr in Q2 and Rs 10,500 Cr in FY26. This should translate into AUM growth of 13% in FY26. With (a) Challenges in key states waning, (b) New branches and the strengthened sales team contributing incrementally to the business, and (c) Gradual increase in ticket size should help the company accelerate the AUM growth to 15% by FY27E. We expect CANF to deliver a steady AUM growth of ~14% CAGR over FY25-28E.

* Confident of Maintaining NIMs at 3.5%: CANF’s margins should find support from the shift towards non-housing loans (LAP), where yields are higher by ~100bps vs Housing loans, alongside its focus on the better-yielding SENP customers. The company aims at improving the share of non-housing loans to 20% by FY28E vs ~14% in Jun’25. Moreover, CANF has seen a pass-through of the repo rate cut in its CoF, with incremental CoF expected at ~7.25- 7.3% with bank borrowings repricing downwards. Moreover, the company is yet to realise the benefit of the rate cuts on NHB borrowings (60% floating where benefit could accrue, if any). The management has indicated that CANF would pass on the rate cut benefit to its customers once it is realised in the CoF. Under the decline in CoF, the company has taken a rate cut on existing and new loans of 10bps in May’25 and another 15bps in Jul’25, the impact of which would be visible on yields in the forthcoming quarters (availed by 1/3rd of the customer base). However, ~67% of the portfolio is reset annually and hence, the impact of the lending rate cut would reflect with a lag. Thus, the management is confident of maintaining Spreads/NIMs at 2.5/3.5% respectively. We expect NIMs to remain steady between 3.5- 3.6% over FY26-28E.

* Sector Outlook: Positive

Company Guidance: With challenges in the core states of KA and TL gradually bottoming out, the visibility on growth has improved. The branch additions and strengthening of its sales team should provide further impetus to growth through the direct channel. CANF’s focus on the better yielding portfolios (LAP) and customer segment (SENP) should enable to company to minimise the impact of the rate cuts, while defending its margins at ~3.5% (+/-5bps). Asset quality is likely to improve throughout FY26, keeping credit costs steady and controlled below 15bps in FY26. Thus, healthy RoA/RoE delivery of 2.1-2.2%/16-17% over FY26-28E is likely to continue. With early signs of growth resuming, we believe delivery and sustenance of growth trends remain key re-rating levers

Current Valuation: 1.8x FY27E BV; Earlier Valuation: 1.6x Sep’26E BV

Current TP: Rs 925/share; Earlier TP: Rs 830/share

Recommendation: We maintain our BUY recommendation on the stock

Financial Performance:

* Operational Performance: CANF’s disbursements growth improved YoY, growing at ~9% YoY, though decelerated sequentially (seasonality) by ~18% QoQ. AUM growth was in line with our expectations at 9/1% YoY/QoQ. AUM growth was mainly driven by the SENP segment, which grew by 14/2% YoY/QoQ (in line with management guidance of growing the SENP segment to support yields/NIMs), while the salaried segment grew by 7/1% YoY/QoQ. The share of Salaried to SENP borrowers stood at 70:30, flat QoQ.

* Financial Performance: NII grew by 13/4% YoY/QoQ. NIMs (reported) were lower QoQ at 3.64% vs 3.82% QoQ. Yields declined by 2bps QoQ, while CoF declined by 9bps QoQ. Spreads improved by 7bps QoQ and stood at 2.62%. NII grew by 13/4% YoY/QoQ. NIMs (reported) were lower QoQ at 3.64% vs 3.82% QoQ. Yields declined by 2bps QoQ, while CoF declined by 9bps QoQ. Spreads improved by 7bps QoQ and stood at 2.62%. Provisions came in marginally higher than expected at Rs 26 Cr (credit costs stood at ~27bps vs 28/16 bps YoY/QoQ). PAT grew by 12/-4% YoY/QoQ

* Asset Quality: GNPA/NNPA deteriorated (owing to seasonal weakness) and stood at 0.98/0.54% vs 0.87/0.46% QoQ.

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