Why you should accumulate shares of Can Fin Homes

For housing finance companies (HFCs), while there is great potential in terms of growth (especially in affordable housing space), they also face stiff competition from banks and larger HFCs. Can Fin Homes, an HFC promoted by Canara Bank and in existence for three decades, is a case in point. Headquartered in Bangalore, it has 186 branches and 14 satellite offices, spread across 21 states and UTs.

Banking on its presence in Tier 2 & 3 cities, Can Fin Homes has grown its loan book at a CAGR of 18 per cent over FY15 to FY21 to ₹22,105 crore. Given its strong underwriting skills and healthy return ratios in the past, the company seems a good long-term bet with its dual presence in higher-ticket sized loans and affordable housing.

While 73 per cent of its loans are for the salaried and professional class, the company also lends to self-employed individuals. Products encompass housing loans (90 per cent of outstanding loans), top-up personal loans (3.6 per cent), loan against property (4.5 per cent), and loan for sites (1 per cent), etc.

The stock currently trades at 3.22 times its book value as of June 2021, a 21 per cent premium to its three year average. Long term investors can hence accumulate the stock on dips.

Good long term bet

With focus on housing loans (90 per cent of loan book) and on salaried customers (73 per cent of loan book), the company has been able to maintain healthy yields of over 9 per cent on its loan book, until FY21.

Besides with a much granular loan book (average ticket size of ₹20 lakh in FY21), and near zero exposure to builder loans (0.03 per cent of loan book), Can Fin Homes has also been able to contain its bad loans. The gross non-performing assets of the company remained at less than one per cent of the loan book, even during the pandemic — 0.76 per cent in FY20 and 0.91 per cent in FY21.

Healthy yields, lower operating expenses, coupled with lower credit costs, helped spur the return on assets (RoA) for the company from 1.23 per cent in FY15 to 2.09 per cent in FY19.

In FY20, with minor aberrations due to the pandemic, the RoA slid to 1.93 per cent. However, with business picking up pace in the second half of FY21, the company’s RoA returned to 2.18 per cent in FY21. Shareholders of the company have been consistently rewarded with a return on equity of 17-24 per cent (17.47 per cent in FY21).

With adequate capital (CAR of 25.5 per cent in FY21) and strong industry tailwinds for affordable housing finance, the company is well-poised for growth in the coming quarters.

Margins may contract

To stifle competition from banks the company lowered its yields in November 2020. Consequently, balance transfers-out dropped to just ₹57 crore in first quarter of FY22, from over ₹250 crore, per quarter in first three quarters of FY21.

Maintaining a lower price differential with banks, the company is confident of posting a loan growth of 16-18 per cent in the coming quarters.

However, the effect of lower yields was contained by a drop in cost of borrowings in the June 2021 quarter. While yields fell by 198 basis points (bps) in the June 2021 quarter (y-o-y), cost of borrowings also dropped by 165 bps (y-o-y). Hence, the net interest margins only dropped by 39 bps.

The outlook for margins remains dicey in the coming quarters. This is because one, the company again increased its yields by 55 basis points in first quarter of FY22, in a bid to keep the rate differential with banks in the range of 75-80 bps.

Two, the cost of borrowing bottomed out to 5.66 per cent in Q1 of FY22, with lower rates on bank loans and the company shifting towards commercial papers and loans from NHBs. Further scope of improvement in cost of funds may be minimal. Net-net while margins may contract in the near quarters, long-term outlook seems stable.

Another near term hurdle for the company’s financials is a likely slippage run rate of 12-15 per cent (as expected by the management) from the restructured book (guided to remain at 2 per cent of outstanding loans). However, the company has prudently provided about ₹33 crore (comes to about 8.25 per cent of expected restructured book) as additional provisions for the same, in June 2021 quarter itself. Its collection efficiencies that dropped in April 2021, picked up well by June 2021 itself and the stage -2 assets witnessed a rise of mere ₹16 crore in June quarter (over March 2021 quarter), indicating high chances of stable asset quality ahead.

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