Can Fin Homes - Structural Transformation To Aid Long Term Performance: ICICI Direct

ICICI Direct Report

Investment Rationale

Geographic expansion and increase in ticket size to aid business growth:

Can Fin Homes Ltd. has delivered consistent performance on growth and earnings along with prudent asset quality. Expect loan growth to continue at healthy pace of 17-18% compound annual growth rate in FY24-25E, driven by branch expansion (15 branches in FY24E), increase in ticket size (currently at Rs 22 lakhs) and diversification in channel including “Approved project file”.

Revamping of processes and IT transformation to enable faster turnaround:

Strategy to revamp process and implement technology, while preserving existing advantages, to result in faster turnaround with improvement in efficiency. Expect transformation to result in elevated cost to income ratio at ~17.5-18% in FY24-25E, post which efficiency is expected to kick in as business momentum starts gaining pace.

Repricing of liabilities largely done; net interest margin to remain stable:

Can Fin Homes has remained of lower cost of funds attributable to factors including parentage, diversified source of funding, strong credit rating and sustained repayment track record. Cost of funds expected to remain steady led while repricing of assets to gradually to pan out till December 2023, expect margins at ~3.3-3.4% and spreads at 2.4-2.5% in FY24-25E.

Strengthening of risk management keeping core advantage intact to aid asset quality:

Can Fin Homes has managed to keep gross non-performing asset at less than 1% during various cycles and Covid-19 was no exception. Restructured book was at Rs 690 crore (~2.2% of total loans) with Rs 67 crore of provision and overlay provision of Rs 17 crore. Expect GNPA ratio at 0.6- 0.7% in FY24-25E with credit cost being largely steady.

Rating and Target price

Can Fin Homes has been best in class housing finance company player with a robust business model & underwriting practices, which resulted in healthy earnings growth with GNPA less than 1% across cycles.

Strategy adopted by new management to strengthen processes and IT infrastructure to further aid business growth and return on asset.

At the current market price, Can Fin Homes trades at ~1.9 times FY25E adjusted book , which seems a good opportunity given its fundamental strength and historical valuation. Hence, we assign a 'Buy' rating with a target price of Rs 935/share.

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