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Operating beat but PAT in line due to high credit costs

Strong AUM growth of ~35% YoY; NIM expanded ~10bp QoQ

* Mr. Ravindra Kundu (currently Executive Director) has been appointed MD & CEO for a period of five years, effective 7th Oct’24.

* CIFC’s 1QFY25 PAT grew ~30% YoY to INR9.4b (in line). NII grew ~40% YoY to ~INR25.7b (in line). Other income grew ~62% YoY to~INR4.6b (6% beat).

* Opex rose ~50% YoY to ~INR11.8b and the cost-income ratio rose ~2pp YoY to ~39% (vs. ~37% in 1QFY24). This was primarily driven by ~110% YoY growth in employee expenses. PPoP grew ~38% YoY to INR18.5b (8% beat).

* GS3/NS3 increased ~15bp/10bp QoQ to 2.6%/1.4%, while PCR on S3 declined ~1pp QoQ to ~45.5%. ECL/EAD increased to 1.77% (~1.72% in 4Q). This translated into annualized credit costs of ~1.5% (1.3% in 1QFY24). Write-offs stood at ~INR3.2b in 1QFY25 (vs. INR2.01b in 1QFY24)

* Disbursements were strong at ~INR243b (in line), up ~22% YoY. New lines of businesses contributed ~24% to the disbursement mix (23% in 4Q). The company continued to conservatively guide for an AUM CAGR of 25-30% over the next five years. We model AUM CAGR of ~27% over FY24-26.

* Yields (calc.) improved ~30bp QoQ to ~14.6%, while CoF (calc.) declined ~15bp QoQ to ~7.9%. NIM expanded ~10bp QoQ to ~6.85%.

* The management expects vehicle finance (VF) yields to improve, with marginal yields around ~40bp higher than book yields. This will reflect in book yields over the next 3-4 quarters. Borrowings from PSBs are typically based on the MCLR, which could see a minor increase going ahead. However, the management anticipates the overall CoB to stabilize. We expect NIMs to expand to ~7.0%/7.1% in FY25/FY26 (vs. ~6.7% in FY24).

* We estimate a CAGR of 22%/27%/35% in disbursement/AUM/PAT over FY24- FY26. While opex may remain high for a year or two due to ongoing investments and pilots in new businesses, CIFC has levers on cost ratios and business AUM growth to deliver healthy RoA/RoE of ~2.7%/22% in FY26. We retain BUY on CIFC with a TP of INR1,675 (4.5x FY26E BVPS).

* Key risks to our target price are 1) higher delinquencies and credit costs in new businesses, particularly CSEL (Partnerships); and 2) cyclicality in the VF business, despite management making efforts to mitigate it.

Key highlights from the management commentary

* Guided for AUM mix of ~50% in VF, ~35% in HL and LAP and ~15% in new businesses. The unsecured portfolio will remain at ~8%.

* Guided for through-cycle credit costs of 1.0-1.2%. It aims to improve RoA to ~3%, aided by opex and NIM improvements over the next two years

Valuation and view

* CIFC is equipped to deliver strong AUM growth with benign credit costs (vs. peers), leading to strong RoE of ~21-22% across economic cycles.

* The stock trades at 3.8x FY26E P/BV. We believe that the premium valuation multiple will sustain as investor confidence improves 1) in the company’s execution capabilities in newer product lines and 2) how it navigates any cyclicality in vehicle demand to deliver strong AUM growth and asset quality through a diversified product mix. Reiterate BUY

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