20 Mar 2017 14:24 IST

Can Fin Homes: Banking on affordability

Focus on low-ticket loans and branch expansion hold the key

Strong regional presence, focus on first home buyers within the salaried class, favourable funding mix and very low delinquencies, have kept Can Fin Homes, a South-based housing finance company’s earnings in good stead. Over the last five years, the company’s loan book has grown by a robust 37 per cent annually and its profit by 30 per cent. The Centre’s various initiatives for the affordable housing segment, such as ‘Housing for All by 2022’ and the recently announced interest subvention scheme, augur well for housing finance companies such as Can Fin that provide small ticket home loans. This should translate into strong growth in loans of over 22-25 per cent in the next three to four years for the company.

Recently, Canara Bank (promoter holding 43.45 per cent stake as of December 2016), sold 13.45 stake in Can Fin, at ₹2,105 per share. Trading at ₹2,092, the stock now discounts its one-year forward book at 3.9 times. The stock has been re-rated significantly, nearly tripling over the last one and half years since our last Buy call. From 1.5 times (Dewan Housing) to about 2.3-2.5 times (LIC Housing, Indiabulls Housing) and three times (HDFC and Repco Home) to as high as 11 times (Gruh), valuations vary widely for players in the housing finance space.

Can Fin is priced in the mid of this range. Given its strong prospects, healthy financials and clean asset quality, the stock is attractively priced, offering good opportunity for long-term investors.

On a strong wicket

Since March 2011, when the turnaround began, Can Fin Homes has been on a tear, thanks to its strong focus on the low-cost housing segment and aggressive branch expansion.

The company has added 79 branches over the last five years. South accounts for 74 per cent of the company’s business. The company has created a niche for itself by offering low-ticket loans — average loan size of ₹18 lakh (housing loans). Can Fin’s focus has always been on the lower risk, salaried segment, which constitutes 77 per cent of the company’s loan portfolio.

The company’s housing loan segment has grown 34 per cent annually over the last five years. In the latest December quarter, its loan book grew 28 per cent y-o-y, with the housing loan segment recording a similar growth.

The management has, however, been increasing its thrust on the high-yielding non-housing segment in the past couple of years which, on a small base, has been growing at a stellar rate. These loans include mortgage loans, loans against property, site loans, personal loans and commercial housing loans. From about 5 per cent in 2012-13, non-housing loans now constitute around 12 per cent of loans.

While this pegs up the risk quotient a tad, it is not a cause for concern, given the company’s calibrated approach. Incremental focus on high-yielding loans, on the other hand, will aid margins, which have already been boosted by the company’s favourable funding mix and downward rate cycle.

Favourable funding mix

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 20 per cent now. The company has, in turn, increased borrowing via debt market instruments, such as commercial papers (CP) and non-convertible debentures (NCD), resulting in lower cost of funds.

Can Fin enjoys the highest rating of its debt instruments by rating agencies. Average cost of borrowings have fallen from 9.83 per cent in 2013-14 to 8.75 per cent in 2015-16 and further to 8.48 per cent in the latest December quarter. The sharp fall, of course, was also aided by the decline in interest rates in the economy over the past one to two years. The company’s cost-to-income ratio too has fallen sharply, from 26.2 per cent in 2013-14 to 17.1 per cent in the latest December quarter. Can Fin’s net interest margin has gone up from 2.7 per cent to 3.49 per cent during this period.

A well-diversified funding mix and measured focus on high-yielding loans should continue to drive margins. The company’s strong return on equity of around 21 per cent and healthy capital buffer are key positives. As of December 2016, the company’s capital adequacy ratio stood at 18.7 per cent. This should help drive growth in loans over the next year or two.

Low delinquencies

Despite its aggressive growth, the company has been able to maintain good asset quality. The non-housing loan segment is still a considerably lower proportion of the entire loan book, mitigating risks. In fact, the company’s gross non-performing assets are down to 0.24 per cent of loans from 1 per cent levels five years back.

With a robust provision coverage ratio of 94 per cent, the net non-performing assets (gross less provisions) is negligible at 0.01 per cent of loans.

(The article first appeared in The Hindu BusinessLine.)

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