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Better quarters in store

Low disb. and higher slippages underwhelming; resilient margin and strong profitability positives

Can Fin’s Q4 FY24 performance was characterized by expectedly modest originations (process changes/tightening), larger-than-expected NPL increase (flow from nonrestructured was marginally higher) and better-than-expected margin performance (Spread/NIM improved qoq). Hence, even while disbursements were lower and credit cost was higher than our expectations, the NIM/PPOP/PAT were 3-5% higher than estimates. With portfolio run-off rate stable, the loan portfolio grew by 2% qoq/13% yoy, marking a significant moderation from 18% growth rate couple of quarters back.

Portfolio NIM improved further by 7 bps to 3.69% on the back of improvement in portfolio yield (10.01% v/s 9.93%) with repricing of residual book (~Rs67bn). Incremental Portfolio Yield was 9.91% and Incremental CoF was 7.35%, and hence Incremental Spread was 2.6%. GNPLs increased by 21% qoq (level rose from 0.76% to 0.91%) due to significant slippages from Restructured portfolio and seasonal increase in slippages from non-restructured book. Higher slippages drove higher-than-usual credit cost at 37 bps. Management overlay provisions of Rs340mn were not utilized by the company. RoA/RoE for the quarter was strong at 2.3%/19.4%

Management confident about significant pick-up in disb./loan growth

Management expects Q4 FY24 disbursements to be Rs25bn+ (Rs28-29bn also a possibility), which will translate into 13-14% AUM growth for FY24. AUM is expected to grow by 15%+ in FY25 and at 18-20% pa thereafter. FY25 disbursements are estimated at ~Rs120bn (avg. quarterly run-rate of Rs30bn). Besides branch addition, lead sourcing from digital channels and push for higher-ticket loans would drive the envisaged increase in disbursement volume. Strategy is to strengthen operations outside South with particular focus on the states of GJ, MH, PB and HR. Co. opened 5 branches/offices in Q3 FY24 (all outside South), and 7-8 would be opened in Q4 FY24. 

Asset Quality to improve and Credit Cost to moderate

Not significant incremental pain is expected from the restructured book and flows witnessed during Q3 FY24 from the non-restructured portfolio are expected to largely reverse. Management expects a reduction of Rs250-300mn in GNPL during Q4 FY24 with the level reaching 0.75-0.8% by March. Further, the co. estimates its GNPL to decline in FY25 to near 0.6%. Credit Cost in Q4 FY24 is expected to be negligible and quite moderate in FY25. While Can Fin is carrying Management Overlay of Rs340mn, the Restructured Provision of Rs580mn (outside ECL coverage) would also reverse over a period. Hence, both these provisions are available buffers.

Spread/NIM will normalize from current elevated level

The company intends to maintain Incremental Spread around 2.5% (despite shift towards higher-ticket size loans), and thus expects NIM of around 3.5% in FY25 (3.69% as of Q3 FY24). Credit Rating upgrade by ICRA to AAA would help in getting more finer rates in the capital markets. Quarterly loan reset has been implemented from January; while existing customers will be given an option to shift, all the new customers would be on quarterly reset.

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