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Disbursements weak and loan growth muted

* Can Fin Homes (CANF)’s 1QFY25 PAT grew ~9% YoY to ~INR2b (7% miss). NII rose 13% YoY to ~INR3.2b (in line), while other income stood at ~INR70m. ? Opex rose ~12% YoY to INR488m (12% below MOFSLe). The cost-to-income ratio came in at ~15% (PQ: 21%, PY: 15%). RoA/RoE stood at ~2.2%/~17.6%.

* Management retained its loan growth guidance of ~15% in FY25, and is confident of achieving disbursements of ~INR105b in FY25. This will be aided by: 1) branch expansions and resultant improvements in productivity, b) enhanced organizational structure with zonal offices, c) investments in improving its APF tie-ups with developers, and d) investments in sales teams and digital marketing.

* Can Fin Homes (CANF)’s 1QFY25 PAT grew ~9% YoY to ~INR2b (7% miss). NII rose 13% YoY to ~INR3.2b (in line), while other income stood at ~INR70m. ? Opex rose ~12% YoY to INR488m (12% below MOFSLe). The cost-to-income ratio came in at ~15% (PQ: 21%, PY: 15%). RoA/RoE stood at ~2.2%/~17.6%. ? Management retained its loan growth guidance of ~15% in FY25, and is confident of achieving disbursements of ~INR105b in FY25. This will be aided by: 1) branch expansions and resultant improvements in productivity, b) enhanced organizational structure with zonal offices, c) investments in improving its APF tie-ups with developers, and d) investments in sales teams and digital marketing.

* We estimate a 15%/14% Advances/PAT CAGR over FY24-26, with an RoA/ RoE of ~2.2%/~17.0% in FY26. CANF, in our view, is a robust franchise with strong moats on the liability side. However, we await: 1) a recovery in disbursement momentum, 2) early signs of execution on loan growth guidance, and 3) clarity on the margin trajectory, before turning constructive on the stock. CANF might also benefit from the potential announcements in the Union Budget on Affordable Housing Fund (AHF) and demand-side incentivization for low-ticket housing. However, at 1.9x FY26E P/BV, we believe valuations are broadly factoring in the positive elements. Reiterate Neutral with a TP of INR890 (premised on 2.0x FY26E P/BV).

State-specific issues hit disbursements; advances rise ~10% YoY

* The AP and Telangana registrations have been hit after the change in the state governments. AP disbursements dipped ~15% YoY, and Telangana disbursements decreased ~40% YoY in 1QFY25. Consequently, CANF’s total disbursements declined 6% YoY to INR18.5b. The April and May disbursements were weak due to elections and seasonality in mortgages. However, disbursements recovered to ~INR8b in Jun’24.

* Advances grew ~10% YoY to ~INR356b. Annualized run-off in advances stood at ~15% (PQ: 16% and PY: ~13%).

Margin contracts QoQ; the share of CP remains stable

* NIM (reported) contracted ~15bp QoQ to ~3.6%. Reported spreads also declined ~15bp QoQ, primarily due to ~20bp QoQ increase in CoB. We model NIMs of ~3.7%/~3.6% for FY25/FY26 (FY24: ~3.8%).

* Bank borrowings in the mix declined to ~56% (PQ: ~59%), while NHB borrowings and the proportion of CPs remained stable at ~16% and ~7%, respectively.

Seasonal deterioration in asset quality

* Asset quality deteriorated, with GS3/NS3 increasing by ~10bp each QoQ to ~0.9%/0.5%. PCR on stage 3 loans declined ~160bp QoQ to ~47%.

* Credit costs stood at INR245m, resulting in annualized credit costs of ~30bp [PQ: ~2bp and PY: ~20bp]

*  The increase in Gross Stage 3 in 1QFY25 was because of seasonal deterioration in asset quality. Recoveries and asset quality exhibited no geographical color, and management shared that delinquencies showed no particular pattern too. Management guided credit costs of ~12bp in FY25. We model credit costs of ~14/18bp for FY25/26.

Expectations on Union Budget announcements to spur housing demand

* The Union Budget may reintroduce allocation towards the affordable housing finance (AHF) fund where NHB offers loans to HFCs at attractive rates that can be utilized for lending to customers with a ~4% capping on spreads. The spread cap for lending of funds availed under the AHF scheme could potentially be increased to 4.5% (from 4.0% earlier).

* CANF previously received ~INR9.75b in CLSS subsidies. About 45% of the outstanding portfolio of CANF was below ATS

Highlights from the management commentary

* CANF guided AUM growth of ~15%, spreads of ~2.55-2.60%, NIM of ~3.5%, and a cost-to-income ratio of ~16-18% in FY25. Management is confident that CANF should be able to deliver ~INR25b of disbursements in 2QFY25. It expects disbursements to improve to INR28-29b in 3Q and ~INR31-33b in 4QFY25.

* The decline in spreads is due to the higher rate of borrowing in 4QFY24. CANF will see a repricing benefit of ~30-40bp (from 2QFY25) on ~INR22b of CP borrowings.

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 in the next few quarters to deliver on its guided loan growth. We estimate a CAGR of 11%/10%/14% in NII/PPOP/PAT over FY24-26, with an RoA of 2.2% and an RoE of ~17% in FY26.

* Reiterate Neutral with a TP of INR890 (premised on 2.0x FY26E P/BV).

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