Neutral Can Fin Homes Ltd For Target Rs.775 by Motilal Oswal Financial Services Ltd
Disbursements weak; Karnataka’s situation a key monitorable
NIM stable sequentially; opex to remain elevated in FY26E on tech. spends
* Can Fin Homes (CANF)’s 3QFY25 PAT grew ~6% YoY to ~INR2.1b (in line). NII rose 5% YoY to ~INR3.4b (in line). Other income was ~INR58m (PQ: INR74m) because of lower disbursements, translating into a lower fee income.
* Opex grew ~20% YoY to INR593m (in line). CANF’s cost-to-income ratio was ~17% (PQ: ~17%, PY: ~15%). Its 3QFY25 RoA/RoE stood at ~2.25%/~17.6%.
* Management guided a loan growth of ~15% in FY26. The company expects disbursements in 4QFY25 to remain in line with levels recorded in 4QFY24. However, if the situation improves in Karnataka (KAR), then it could exceed the above guidance. Further, management guided FY26 disbursements of ~INR120b, if the prevailing e-Khata issues in KAR are resolved.
* We estimate an advances/PAT CAGR of ~12% each over FY24-27, with an RoA/ RoE of ~2.2%/~16.0% in FY27. CANF, in our view, is a robust franchise with strong moats on the liability side. However, we await: 1) execution on loan growth guidance considering the prevailing situation in KAR and 2) disruptions (if any) from the tech transformation that the company will embark on in the current calendar year before turning constructive on the stock. The stock’s valuation of 1.4x FY27E P/BV suggests management’s inability to deliver on its loan growth guidance because of recurring external events that impede strong business momentum. We reiterate our Neutral rating with a TP of INR775 (premised on 1.6x Sep’26E P/BV).
Disbursements weak due to disruption in KAR; advances rise ~9% YoY
* CANF’s 3QFY25 disbursements were flat YoY and declined 21% QoQ to INR18.8b. The impact was mainly on account of issues pertaining to registration in KAR following the introduction of E-Khata.
* Advances grew ~9% YoY to ~INR372b. Annualized run-off in advances stood at ~14% (PQ: 15% and PY: ~14%).
Margin broadly steady QoQ; borrowing mix stable
* NIM (reported) was broadly stable QoQ at ~3.73%. Reported spreads expanded ~10bp QoQ from both an improvement in yields and a decline in the CoB. The improvement in SENP and LAP mix has contributed to the rise in yields. We model NIMs of ~3.7% each for FY26/FY27 (FY25E: ~3.8%).
* There was no change in the borrowing mix during the quarter. The company raised ~INR16b during the quarter from the NHB at a blended rate of ~7.6%, which was 30-35bp lower than the cost of its bank borrowings.
Minor deterioration in asset quality; GS3 rises ~5bp QoQ
* Asset quality exhibited minor deterioration, with GS3 rising ~5bp QoQ to ~0.92% and NS3 rising ~3bp QoQ to ~0.5%. PCR on stage 3 loans dipped ~80bp QoQ to ~45.2% during the quarter.
* Provisions stood at INR220m (vs. MOFSLe of INR121m) resulting in annualized credit costs of ~25bp (PQ: ~15bp and PY: ~35bp).
* The company expects improvements in its SMA0 book in 4QFY25. Further, the company expects NPAs to improve and guided for credit costs of ~15bp in FY25 as well as FY26. We model credit costs of ~17bp/15bp for FY26/FY27
Highlights from the management commentary
* CANF faced a setback in KAR, losing ~INR4b in disbursements due to delays in property registrations following the introduction of the e-Khata system.
* All bank term loans have been moved to Repo Rate/T-Bill-linked loans, with no bank loans now linked to MCLR. Additionally, the company has also been able to negotiate with the banks for a better rate.
* CANF guided for disbursements of INR120b and loan growth of ~15% in FY26. Management further guided that the cost-to-income ratio will increase to ~18.0- 18.5% in FY26, following the implementation of its technology transformation.
Valuation and view
* CANF has successfully demonstrated its ability to maintain its pristine asset quality for several years, and we expect the same to continue. However, CANF will have to accelerate its disbursements over the next few quarters to deliver on its guided loan growth. We estimate a CAGR of 10%/9%/12% in NII/PPOP/ PAT over FY24-27, with an RoA of 2.2% and RoE of ~16% in FY27.
* Reiterate Neutral with a TP of INR775 (premised on 1.6x Sep’26E P/BV).
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