Stock Fundamentals

Can Fin Homes: A safe shelter -Buy

Radhika Merwin | Updated on July 14, 2019 Published on July 14, 2019

Strong regional presence and focus on the low-risk salaried segment should pay off

For the stressed non-banking finance company (NBFC) sector, the Budget offered some respite. While the sector’s expectation of a special refinancing window did not materialise, the Budget proposed other measures to ease pressure on the sector. Key among them is the one-time partial credit guarantee (PCG) to public sector banks for high-rated assets of financially-sound NBFCs, strengthening the regulatory authority of the RBI over NBFCs, and shifting the regulation of the housing finance sector from NHB to the RBI.

While these measures and the Finance Minister’s commentary have helped restore some of the beaten down confidence in the NBFC/HFC (housing finance sector) space, in reality, how much of an impact these proposals would have on the ground is unclear.

As many NBFCs/HFCs (the sound ones) have already been monetising good assets to raise funds, the PCG proposal could benefit only few players. For others, with structural issues in their loan portfolio and funding mix, challenges could persist. The other regulatory measures (on the RBI’s increased authority) would yield results only in the long run. Hence, investors should remain selective and stick with businesses having sound financials, good quality loan portfolio, diversified funding base, and prudent risk mitigating framework. This is particularly true for HFCs, as the asset-liability mismatch is more pronounced — lending for 15-20 years with no similar long-term funding source.

Can Fin Homes that focusses on the low-risk salaried home segment and has a strong regional presence, is a good bet for the long term. The HFC has managed to tide over the liquidity crisis, thanks to its diversified funding mix and ability to raise funds from banks.

After the fall last year — when the IL&FS crisis first broke out last September — the stock has gained about 24 per cent since January, more than recouping its losses. At the current price, the stock trades at 2.4 times its FY20 book, which is lower than its three-year historical average of about three times.

 

Investors should note that interim shocks in the sector can impact Can Fin Homes too over the coming year. But if you have a long term horizon of over five years, and looking to bet on the prospects of the housing finance space, you can consider buying the stock at current levels. The company’s healthy financials and the Centre’s push towards affordable housing segment, should keep earnings in good stead over the long run.

Healthy growth

 

After a robust growth in loans of over 35 per cent CAGR (compounded annual growth rate) between FY12 and FY17, Can Fin Homes witnessed some moderation in credit growth to 18-odd per cent levels in FY18.

Demonetisation and implementation of RERA or Real Estate (Regulation and Development) Act, impacted the growth in its key market — Karnataka. In FY19, growth in loans slowed down a bit more (17 per cent), but given the turmoil in the housing finance space, the growth is healthy.

Can Fin Homes focusses on the salaried home loan segment with an average ticket size of ₹18 lakh. The company’s risk is mitigated by the fact that it lends primarily to the individual home loan segment (89.3 per cent of loans); exposure to loan against property (LAP) portfolio is minimal. This has helped the company maintain its asset quality stable GNPA at 0.62 per cent as of March 2019.

The company’s funding profile is diversified across debt market instruments, National Housing Bank (NHB) and bank borrowings. Over the past year, it reduced its market borrowings and increased funding from banks. It has not faced as much of a liquidity issue, but the cost of funds have gone up, hitting margins.

There is notable asset liability mismatch in the up to one-year category for Can Fin. But the management states that, according to its experience, loans have an average 10-12 years tenure, as borrowers tend to prepay.

Also, the company enjoys substantial undrawn overdraft facility from banks, including the parent bank (Canara Bank holding 30 per cent stake), which can be utilised, if needed. The company (according to its presentation) expects to have a surplus of ₹1,300-1,400 crore over the next three quarters. The liquidity buffer mitigates the concerns on ALM to some extent.

To stimulate demand in the residential market, the Centre has announced additional deduction in income tax of ₹1.5 lakh for interest paid on housing loans for affordable housing properties (valued up to ₹45 lakh), over and above the exiting deduction of ₹2 lakh.

Further, to narrow the demand-supply gap in the market, the Centre has proposed to open up land parcels of government and public sector undertakings to be utilised for affordable housing and public infrastructure.

Players such as Can Fin will benefit from the Centre’s continued thrust on the affordable housing segment. Can Fin Homes has been opening affordable housing loan centres (AHLCs) to lend exclusively in the peripheral areas of the Tier-1, Tier-2 and Tier-3 cities. Currently, the company has 21 AHLCs.

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