Can Fin Homes: Homing in on opportunities

Increased allocation for the affordable housing segment in the Budget and healthy financials are positives for the company

 

In line with the Centre’s vision to provide housing for all by 2022, housing finance players and banks have been steering their focus towards the affordable housing segment. With each player cherry-picking the customer segment it intends to cater to within the low-cost housing space, there appears immense opportunity for all players.

Within this, housing finance companies such as Can Fin Homes with focus on the low risk salaried home segment, a strong regional presence, favourable funding mix and good asset quality are a good bet for long investors wanting to ride the fortunes of this sector.

In a bid to cater to the affordable housing segment, Can Fin Homes has been opening exclusive Affordable Housing Loan Centres (AHLCs). As of December 2017, the company had opened 20 AHLCs. Of the total loan book, 74 per cent is accounted for by salaried and professional category of borrowers. In the nine months ending December 2017, 92 per cent of fresh approvals were to borrowers with income below ₹18 lakh. The upper limit on income eligibility criteria for the Centre’s Credit Linked Subsidy Scheme (CLSS) for middle income category is ₹18 lakh. Of the 92 per cent fresh approvals, 40 per cent were to borrowers with annual income up to ₹6 lakh (eligible for CLSS under low-income group category).

Expectations run high of an increased allocation and further push from the Centre towards affordable housing segment in the upcoming Budget. Players such as Can Fin Homes will stand to benefit from this. The company’s track record of steady loan growth and healthy return ratios remain key positives.

In the latest December quarter, however, the company saw a rise in bad loans. Particularly, the net non-performing assets (gross NPA less provisions), which was negligible at 0.01 per cent of loans as of March 2017, have inched up to 0.25 per cent. The management, post its results, explained that they have not provided full for its gross NPAs as in the past because it is confident of recovering a substantial amount by March. While the trend may need monitoring in the coming quarters, delinquencies are still quite low within the industry.

Canara Bank currently holds 30 per cent stake in Can Fin Homes. It has proposed to offload 4 per cent stake in the company. This is unlikely to impact the parentage Can Fin Homes enjoys with Canara Bank.

 

 

Trading currently at ₹443, the stock now discounts its estimated FY-19 book at 3.5 times. From 1.9 times (Dewan Housing, LIC Housing Finance) to about 2.8 times (Repco Home) , 3.8 times (Indiabulls Housing) and to as high as 14 times (Gruh Finance), valuations are widely dispersed for players in the housing finance space.

Can Fin Homes is priced in the mid of this range and is attractively priced, given its strong prospects and healthy financials.

Investors with a three to five year horizon, wanting to bet on the growing housing finance space, can make use of the recent correction to buy the stock.

On track

Between FY-14 and FY-17, the company’s loan book has grown by a robust 32 per cent CAGR (compounded annual growth rate) and its profit has increased by 46 per cent. This is thanks to the company’s strong focus on the low-cost housing segment and healthy branch expansion (87 branches added between FY-14 and FY-17).

 

 

Given the stellar growth, Can Fin’s focus on relatively lower risk segments lends comfort. As of December 2017, housing loans constitute 89.5 per cent of loan portfolio, while high-yielding riskier non-housing segment (primarily loans against property, commercial housing loans, etc.) account for 10.5 per cent of the loan book. The company’s primary focus remains on the salaried segment which reduces the risk further.

In the latest December quarter, the company’s loan book grew by 19 per cent YoY.

Healthy profitability

Aside from strong loan growth and sound operational efficiency, the company’s diversified funding mix has aided profitability. Can Fin Homes has been progressively reducing its dependence on costlier bank borrowings over the years. From 68 per cent in 2011-12 and 44 per cent in 2013-14, the share of high-cost bank loans is down substantially to 22 per cent now.

As of December 2017, 58 per cent of its funding was through market borrowings, 22 per cent through banks and 18 per cent through National Housing Bank (NHB). The company’s average cost of borrowings have fallen from 9.83 per cent in 2013-14 to 8.35 per cent in 2016-17 and further to 7.72 per cent in the latest December quarter. The decline in interest rates in the economy over the past one to two years would also have contributed to the fall in cost of borrowing.

The company’s cost-to-income ratio too has fallen sharply, from 26.2 per cent in 2013-14 to 14.5 per cent in the latest December quarter. Can Fin’s net interest margin (NIM) has gone up from 2.7 per cent to 3.5 per cent during this period.

While in the latest December quarter, NIMs have moderated slightly from the first half of the fiscal, a well-diversified funding mix should continue to aid margins over the long run.

Low delinquencies, high provision cover

Despite its aggressive growth, the company has been able to maintain good asset quality. However, gross non-performing assets as a per cent of loans have risen over the past three quarters — from 0.21 per cent of loans as on March 2017 to 0.46 per cent as of December 2017. While delinquencies are still low and are not much of a concern, the trend may need monitoring in the coming quarters.

Nonetheless, the company’s strong return on equity of around 23.7 per cent and healthy capital buffer — capital adequacy ratio of 19 per cent as of December 2017 — are key positives.

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