PL Stock Report: Can Fin Homes (CANF IN) - Management Meet Update - Structural issues being sorted - BUY

Can Fin Homes (CANF IN) - Gaurav Jani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs738 | TP: Rs900

Management Meet Update - Structural issues being sorted

Quick Pointers:

§ Risk management is being strengthened; process revamp underway.

§ Process change should not impact growth; balance sheet remains strong.

We hosted the Can Fin Homes senior management represented by MD&CEO, Mr. Suresh Iyer who suggested that last 2-3 years had seen aggressive focus on sales over risk monitoring which needed to change. Hence to alleviate risk management gaps, processes are being tightened. As part this exercise, CMS centralization and staff rotation brought to light fraud of Rs385mn. To ensure such an episode is not repeated, processes are being revamped which could take 1-2 quarters to execute. However, as per MD&CEO loan growth would not be impacted. Near term concern is likelihood of another irregularity and our interaction suggests that clarity would emerge in next 2 quarters. Hence stock could remain range bound until investors derive confidence from consistency in earnings. However, we remain optimistic about Canfin as Mr. Iyer is taking the right steps to ensure structural issues are ironed out. We cut PAT for FY24/25/26E by ~4% each and hence tweak multiple from 2.3x to 2.2x on Sep’25E ABV. Retain BUY but reduce TP from Rs950 to Rs900.

§ Processes are being strengthened: Since last 2-3 years, more weightage was given to sales over risk management, which needs to change. Disbursals and reconciliation are being centralized. Dedicated training and fraud control departments (FCU) are being set up. Centralized CMS, disbursal, and reconciliation will be implemented in Q2FY24. However, FCU might take a little longer and is expected to be operational by Dec’23. Canfin will add ~25 people across audit, CRM and training. All branches will come under credit monitoring (earlier 105 branches). All KRAs are under review; responsibilities of cluster head and branch head have been separated. Strengthening of processes could take 1-2 quarters which should not impact growth.

§ Growth guidance of 18-20% for FY24 maintained: While growth could be impacted due to system demand slowdown, company does see any challenges due to process revamp. As reconciliation is being centralized, some staff would be freed up which can support growth. Disbursal target of Rs105bn for FY24 has been maintained, hence 18-20% loan growth may be achieved. Marketing department is added since DSA sourcing has to reduce and hence at least 1 employee is identified for marketing activities in each of 51 branches having portfolio size of more than Rs2bn. Competition is intense from banks in ticket size above Rs3mn although Canfin does business below this threshold.

§ No downside risk to NIM; target to keep spread above 2.5%: CoF could moderate from hereon as cost of CP and NCDs have come down by 40-50bps. 3-yr bonds were raised at a peak of 8.45% in Feb’23 while incremental cost of funds is 7.9%. Negotiations are on with banks for better spreads and HDFC merger could translate to better rates as credit lines will get vacated and funding caps for HFCs would open up, benefiting Canfin. Target is to maintain spread at 2.5% and any further advantage will be used for growth. However, downside risks to NIM are protected over 2-3 years due to higher proportion of floating rate liabilities given rates have peaked out. As HDFC Ltd. was focused more on builder tie-ups, merger could also benefit Canfin on the asset side.

§ OTR pool behaving well; adequately provided for: Of Rs6.9bn of OTR pool, Rs2.12bn is eligible for NPA evaluation as 3-EMIs have become due (came up for repayment in Feb/Mar’23). Of this, Rs180mn has slipped to NPA. In terms of volume, 1,320 accounts have come out of moratorium of which 106 accounts have turned NPA. Provision buffer on OTR book is adequate as (1) 10% cover on OTR book is maintained (2) there is additional Rs170mn cover on OTR and (3) NPA from OTR (Rs180mn) carries provision of Rs90mn. Assessment of OTR pool can only be done in Mar’24 i.e. 3 months after the last tranche of restructured book becomes due (by Nov’23). Company has maintained that of the restructured pool worth Rs6.9bn, 10% could turn into NPA.

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