Housing Finance Stock: Prabhudas Lilladher Recommends BUY On Can Fin Homes For Rs 900 TP, 17% Potential Upside

Housing finance stock in midcap space, Can Fin Homes is recommended as BUY despite a mixed third quarter for FY24. Prabhudas Lilladher said that Canfin is on a path of structural transformation and most of the process strengthening is over. The brokerage has set a target price of Rs 900 on the stock which is currently trading near Rs 770 apiece. There is a potential of nearly 17% upside in Can Fin Homes.

On BSE, Can Fin Homes' shares ended at Rs 770.10 apiece, up by 3.27% on January 25 with a market cap of Rs 10,254.20 crore.

In Q3FY24, Can Fin Homes reported a net interest income (NII) of Rs 328.83 crore, higher from Rs 251.71 crore in Q3FY23 and Rs 316.77 crore. While PAT stood at Rs 200.13 crore, also up from Rs 151.50 crore in Q3FY23 and Rs 158.07 crore in Q2FY24.

However, in the quarter, the company reported loan disbursements of Rs 1,879.46 crore, lower from Rs 2,408.03 crore in Q3FY23 and Rs 2,019.16 crore in Q2FY24. Also, its new approvals dipped to Rs 2,052.52 crore in Q3FY24 versus Rs 2,587.31 crore in Q3FY23 and Rs 2,123.48 crore in Q2FY24.

In its research note, Gaurav Jani - Research Analyst, Prabhudas Lilladher said, "Canfin saw a mixed quarter; NIM was 8bps higher to PLe due to lower funding cost, while loan growth and asset quality were weaker. Credit flow was softer at Rs18.8bn and missed PLe by 21% due to centralization of disbursals and reconciliation. However, disbursal run-rate has normalized in Dec'23 to Rs7bn and AuM for FY24 may grow by 12% YoY. We are factoring a 15% CAGR in loans over FY24-26E led by (1) ticket size increase and (2) expanding branch base/digital tie-ups."

However, Jani added, "we are watchful of credit growth given tight systemic liquidity and higher competitive intensity from banks. Under the leadership of Mr. Iyer, Canfin is on a path of structural transformation and most of the process strengthening is over. We also appreciate that quality of disclosures has improved significantly over last few quarters. Mgmt. overlay buffer of Rs343mn is intact. We maintain multiple at 2.2x on Sep'25E ABV and TP at Rs900. Retain 'BUY'."

Jani highlighted three key factors on Can Fin Homes. They are:

1. Weak quarter due to lower loan growth and higher stage-3: NII was a slight beat at Rs3.29bn (PLe Rs3.25bn) as NIM (calc.) surprised positively at 4.1% (PLe 4.0%). Better NIM was a function of lower CoF at 7.67% (PLe 7.85%). Reported NIM was 3.69% compared to 3.62% in Q2'24 and 3.47% a year ago. Loan growth was lower at 13% YoY (PLe 14.8%) to Rs340.5bn as disbursals were a miss at Rs18.8bn (PLe Rs23.9bn), while repayments at Rs11.85bn were in-line. Fees was Rs64mn, while opex was Rs494mn (PLe Rs587mn). PPoP at Rs2.86bn was 4.9% higher to PLe, led by lower opex. Asset quality deteriorated as GNPA/NNPA rose by 15/6bps each QoQ to 0.9%/0.5% due to slippages from OTR. Provisions were a tad higher Rs308mn (PLe Rs225mn) split as: NPA - Rs294.5 and standard asset - Rs13.6mn. PAT was Rs1.96bn (PLe Rs1.93bn).

2. Disbursal performance critical: Credit flow for Q3'24 was muted due to transition towards centralization of disbursal and reconciliation that led to an added layer of approval. However, credit flow normalized in Dec'23 to Rs7bn and company sees disbursals at Rs25bn in Q4FY24 estimated at Rs8bn per month. Annual disbursal growth of 20% should translate to YoY AuM growth of 15-16% for FY25/26E although management is targeting higher run-rate of Rs30bn per quarter in FY25 given, (1) higher ticket size under API structure (2) more CRM tie-ups along with digital penetration and (3) enhancement of branch base. Focus is to increase presence in unexplored regions of north and west and reduce south exposure from 79% to 60%. Company would also like to reduce DSA share to 60% from current 80% over next 2-3 years.

3. ICRA rating upgraded; lower IT spends expected: Canfin was upgraded by ICRA from AA+ to AAA. Hence, competitive pricing (due to increase in ticket size) would be offset by lower NCD cost (may decline by 10-15bps). There would be a slight delay in IT spends which may reduce its quantum and company expects yearly other opex of Rs520-530mn in addition to Rs150mn of IT costs. QoQ spike in Stage-3 of 15bps to 0.9% was attributable to OTR and entire portfolio is out of OTR. Mgmt. overlay reserve of Rs343mn is intact.