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Earnings in line; NIM to expand further in 2HFY24

Acknowledgement of stress in partnership-led unsecured loans

* CIFC’s 2QFY24 PAT grew 35% YoY to INR7.6b (in line), while NII increased by 35% YoY to ~INR20.2b (in line).

* Opex rose 43% YoY to ~INR9.5b (in line), and the cost-to-income ratio increased by ~1pp YoY to ~40% (vs. ~39% in 2QFY23). The opex ratio remained elevated in 2QFY24 due to inherent seasonality in 2Q and annual increments and promotions given to employees effective from July.

* GS3/NS3 declined ~10bp each QoQ to 3.0%/1.6%, while S3 PCR increased by ~2pp QoQ to ~47%. Annualized credit costs remained stable YoY at 1.3%.

* Although GS3 in new businesses deteriorated to 1.4% (vs. 1.0% in 1QFY24), it is not alarming. CIFC also increased S3 PCR on new businesses to 63% (vs. 59% in 1Q). The management acknowledged stress build-up in unsecured loans originated through partnerships (GS3: ~4%) and said that corrective actions have already been initiated to improve asset quality in this loan book.

* New businesses contributed ~23.5% of disbursements in 2QFY24. Despite relatively higher credit costs in new businesses, higher yields in these segments (CSEL and SBPL) will be RoA accretive from FY25 onward.

* NIM expanded ~10bp QoQ as borrowing costs declined ~5bp and yields expanded. We expect NIM to further expand in 2HFY24. We model NIM of ~6.9% in FY24 and expect it improve to 7.2%/7.3% in FY25/FY26.

* We estimate a CAGR of 23%/27%/31% in disbursement/AUM/PAT over FY23- FY26. CIFC has levers on cost ratios and business AUM growth to deliver healthy RoA/RoE of ~2.8%/22% in FY26. We believe in CIFC’s ability to sustain profitable growth in this franchise. Maintain BUY with a revised TP of INR1,420 (based on 4.3x Sep’25 BVPS).

* Key Risks: 1) Higher delinquencies and credit costs in new businesses, particularly CSEL; and 2) deep cyclicality in the vehicle finance business even though the management is making efforts to reduce this cyclicality.

Key highlights from the management commentary

* The management has guided for FY24 credit costs of ~1.0-1.2% across cycles and said that it expects asset quality improvements in vehicle finance and LAP in 2HFY24.

* Traditional channels account for ~75% of the CSEL mix and partnership-led channel account for ~25% (INR22b). Partnership-led business is protected by FLDG. The management guided unsecured loans at ~10% of total AUM.

Valuation and view

* The vulnerable asset pool (Stage 2 + 3) declined ~40bp QoQ to 6.2% despite 2Q being a seasonally weak quarter. The improvement in the 30+dpd pool is likely to be driven by organic collections without any extraordinary write-offs.

* CIFC is a franchise equipped to deliver strong AUM growth with benign credit costs (relative to peers), translating into sustainable RoE of ~22% across economic cycles

* The stock trades at 3.4x Sep’25E P/BV. We believe that these premium valuation multiples will sustain as investors keep gaining more confidence in its execution capability in new product lines and that it will be able to successfully tide over the sectoral stress in personal loans. Maintain BUY.

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