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1 Dec 31, 2015 Can Fin Homes Ltd. No. of shares (m) Mkt cap (Rs crs/$m) 2888/434.8 Current price (Rs/$) 1085/16.3 Price target (Rs/$) 1206/ W H/L (Rs.) 1120/455 Book Value (Rs/$) 311/4.7 Beta 1.2 Daily volume (avg. monthly) P/BV (FY16e/17e) 3.2/2.7 P/E (FY16e/17e) 19.6/14.4 Cost to Income (FY15/16e/17e) 26.6/25.0/24.5 EPS growth (FY15/16e/17e) 12.2/33.5/36.0 NIM (FY15/16e/17e) 2.5/3.0/3.1 ROE (FY15/16e/17e) 14.1/17.7/20.4 ROA(FY15/16e/17e) 1.2/1.5/1.6 D/E ratio (FY15/16e/17e) 9.6/10.9/11.9 BSE Code NSE Code CANFINHOME Bloomberg CANF IN Reuters CNFH.BO Shareholding pattern % Promoters 43.5 MFs / Banks / FIs 0.8 Foreign 1.1 Govt. Holding 0.0 Non-Promoter Corp Total Public 29.8 Total As on Sep 30, 2015 Recommendation ACCUMULATE Phone: + 91 (33) E- mail: research@cdequi.com Company Brief Can Fin Homes Limited is the first housing company to be promoted by a nationalized bank in India, set up under the sponsorship of Canara Bank in Canara Bank holds 43.45% of the company s equity capital. CFHL offers a range of loan products, housing and non-housing loans at competitive interest rates to suit the needs of the customers. Quarterly Highlights Can Fin Homes, the housing finance associate of Canara Bank, reported a 74.4% growth in the net interest income for the September quarter at Rs crore as against Rs crore in the same quarter of the previous year. The net interest margin for the quarter improved to 3.1% from 2.4% in Q2FY15 and 3.0% in Q1FY16 which can be mainly attributed to the benefits of product mix and low borrowing cost arising from cheaper sources of finance like commercial papers and non convertible debentures. The Pre-provision profit for Q2FY16 stood at Rs crore almost doubling from the previous year profits while the net profit grew by 91.8% to Rs crore as compared to Rs crore in the corresponding period of the previous year. The sharp increase in the profits has been mainly due to the effective technology absorption and a tight enterprisewide cost management which is expected to continue as CFHL has started mobilizing funds through commercial papers of different maturities at lower costs. The loan book as on Sept 2015 stood at Rs 9303 crore marking a substantial growth of 32.2% from Rs 7037 crores as on Sept 2014, growing faster than the industry. The company raised its borrowings by 30.3% to Rs 8357 crore complementing the growth in the loan book. The company expects to reduce its GNPA from 0.29% to a substantial level at the end of this fiscal year. The stock currently trades at 3.2x FY16e BV (19.6x FY16e EPS) and 2.7x FY17e BV (14.4x FY17e EPS). CFHL s ability to outperform the housing finance industry (40.9% vs 24%) has resurrected its fortunes. It stands out not only for precluding accretion in stress assets but also posting top decile earnings growth (34.8% average annual growth) over the next two years. We, therefore, retain our accumulate rating on the stock with revised target of Rs 1206 (previous target Rs 865) based on 3x FY17e BV (for more info refer to our report dated August 31). Figures (Rs crs) FY13 FY14 FY15 FY16e FY17e Net Interest Income Non Interest Income Pre-Provision Profits Net Profit EPS EPS growth (%) Equity capital

2 [ CD Equisearch Pvt Ltd Outlook & Recommendation Technology Initiatives In order to sustain in this fast growing economy, companies have to grab the opportunities and reap the benefits of the new technologies coming into play. Can Fin Homes has linked all the branches and registered offices on a core banking platform (Integrated Business Suite) under application service provider (ASP) model, which has given a good boost for effective delivery of service to customers with a very good data management. In order to improve the operational efficiency, Can Fin has taken the initiative to introduce online application module in the company s website to submit applications online, customer portal in the website to draw account statements/certificates at customers end, missed call facility to borrowers to inform them about outstanding balances in their loan accounts, SMS alerts to remind borrowers of loan installments/new schemes. The Electronic Clearing System (ECS) facility for collection of installments covers 72% of the new accounts making the recovery process smooth and hassle-free. Outlook of Housing Finance Industry The demand for housing is on the rise on account of the thrust on infrastructure development, development of smart cities and growing household income. As such, a modest increase in the demand for residential units and commercial real estate can be expected during Pivoted on the factors of brightening prospects of economic growth, favorable demographics, high confidence and optimism about the long term growth of employment and household incomes, the country s housing finance book is expected to double over the next five years. Along with this, the monetary policy announcements also indicate softening of interest rates. With the ever increasing demand for housing in both urban and rural areas, policy based efforts are being initiated to encourage and make the sector more transparent, and so almost all the banks and financial institutions have been vigorously active in the arena to grab a bigger share of the market. The RBI and the Government continued the policy of managing inflation, promoting investment through employment generation and improving infrastructure. The real estate industry (including housing) is expected to strengthen in the current year across the country; credit off take is likely to improve. Reduction of interest rates is expected and the consequent impact on spreads is expected to sustain. Suggestions have been made to impart dynamism into the housing finance sector like tapping of the capital market, securitization of mortgages, downmarketing of housing finance, strengthening and promotion of the contractual saving scheme, expansion of the fiscal incentive base and bringing about a level playing field between the HFIs and other financing institutions. 2 2

3 Roadmap for CFHL Can Fin Homes operates with high levels of operational transparency and embraces the most ethical business practices. Despite the slowdown in real estate sector in some parts of the country and stiff competition from HFCs and banks, the business performance of CFHL continues to be robust during CFHL continues to have a strong marketing and distribution network with a pan-india presence. It has adopted a new strategy of opening satellite offices to improve business and cater to customers better with reduced operational costs. The company expects to increase its branches and satellite offices to 140 (117 in the previous year) by the end of this fiscal. CFHL will continue to focus on credit quality and also avert significant slippages in NPAs. Apart from improvement in asset quality, it will focus on lending to individual segments, increasing the non-housing loan portfolio to around Rs 2000 crore by the end of this fiscal which will help it to drive yield significantly and optimize borrowing costs. Can Fin s Vision 2020 plan envisage a loan book of Rs crore with a CAGR of 30%. The company sees a positive increase in loan book and aims to expand it to around Rs crore by the year end; non housing loans to reach 20% of gross credit; self employed and non professionals category to reach 25% of the loan outstanding. As a step towards garnering more business to facilitate deeper penetration into the market, the services of direct selling agents (DSA) are also being utilized for marketing loans and sourcing retail proposals with an outgo in payment of nominal commission. The direct selling agents are permitted only to source the proposals/provide leads while CFHL continues to exercise control over the credit, legal and technical aspects. Financials and Valuations The fundamental performance fuelling the rally for the period FY12-FY15 has been very powerful. The loan book of Can Fin Homes increased to Rs 8231 crore in FY15 (Rs 5844 crore in FY14) registering a growth of 40.9% as against the housing finance industry s average of 24%. CFHL continues to focus on increasing the non housing loan portfolio as we saw a yoy growth of 82% (from Rs 513 crore to Rs 934 crore). At the end of the September quarter, 83% of the loan book belonged to the salaried and professional class (individual housing loans), while only 17% was accounted by the non-salaried class. The loan book is mainly dominated by the less volatile and demand driven South Indian market which accounts for 75% of the book size. During the year FY15, the housing and other loans sanctioned were to the extent of Rs 3670 crore while the loans disbursed were to the extent of Rs 3346 crore. 3 3

4 What is even more impressive with regard to this growth is its quality. For the last five fiscals, the net NPA has been nil at this housing finance company which is a feat not many HFCs can claim to have. The gross NPA declined from 0.21% to 0.17% as on 31 st March, The company also enjoys AAA/A1+ ratings which enabled them to mobilize resources through the issue of commercial paper at attractive interest rates, strengthening their fund base. Can Fin made a right issue of Rs 276 crore (issue price at Rs 450 per share) which helped it shore up its capital adequacy ratio and create a corpus to sustain the capital requirements. The ability to diversify the borrowing basket as well as lending basket has enabled it to achieve 32.3% increase in net interest income of Rs 178 crore in FY15. Pre-provision profit grew by 36.3% (from Rs crore to Rs crore) in FY15 which was the result of a strong growth in loan book, effective technology absorption and a tight enterprise-wide cost management. Going forward we expect the net interest margins to improve to % due to increase in dependence on money markets which will accelerate the NII to Rs 285 crore in FY16 and Rs 384 crore in FY17. Moreover, a tight control on both operating and finance costs- driven by growing employee productivity and increasing automation will increase the net profit to Rs 147 crore and Rs 200 crore in FY16 and FY17 respectively at an average annual growth of 34.8% ( net profit of Rs crore in FY15). 4 4

5 Backed by higher than expected net interest margins( 3.0% vs 2.7% earlier) and tight lid on operating cost (cost to income ratio: 25% vs 26.6% earlier) we have revised our EPS estimate from Rs to Rs in FY16; FY17 s also stands revised at Rs as against Rs earlier. The stock currently trades at 3.2x FY16e BV (19.6x FY16e EPS) and 2.7x FY17e BV (14.4x FY17e EPS). CFHL s ability to outperform the housing finance industry (40.9% vs 24%) has resurrected its fortunes. It stands out not only for precluding accretion in stress assets but also posting top decile earnings growth (34.8% average annual growth) over the next two years. We, therefore, retain our accumulate rating on the stock with revised target of Rs 1206 (previous target Rs 865) based on 3x FY17e BV (for more info refer to our report dated August 31). Risks and Concerns Margins pressure Lending is the main activity of housing finance companies requiring maximum prudence on the part of lending financial institutions. Inflationary trends, increased cost of borrowing and narrowing down of margins, intense competition, pose a big challenge for sustaining profitability on a consistent basis. With interest rates declining and the home loan sector facing declining asset quality, HFCs will face pressure on margins. The volatile macroeconomic environment, more precisely fluctuations in interest rates, makes housing finance institutions more vulnerable to certain risks such as credit risk, liquidity risk, and interest rate risk. Policy paralysis CFHL has put in place effective credit norms and appraisal systems, which are monitored at regular intervals at the branch level as well as at the registered office level. With a view to minimizing the liquidity risk, CFHL has followed the technique of spreading the borrowings amongst different lenders like banks, NHB and money markets (at lower interest rates) so as to reduce the concentration risk. The major concern is the broadening gap between the demand and supply of affordable housing units and lack of adequate financial solutions to help minimize this gap. Even though the government has come out with attractive housing schemes for accommodating the economically weaker section there is still a lot more to be done to fill the gap. Cross Sectional Analysis Company Equity* CMP Mcap IO* Profit* LIC Housing Finance Indiabulls Housing** Gruh Dewan Repco GIC housing Can Fin *figures in crore, **Consolidated result, all figures on ttm basis 5 ROE (%) ROA (%) P/BV P/E 5

6 The growth of the loan book for Can Fin Homes has been very impressive as compared to its peers like Gruh, Dewan and Repco. With a growth of 45.5% in FY14 and 40.9% in FY15, CFHL continues to build a strong market in the housing finance industry, even though Dewan leads its peers in terms of absolute book size (Rs crore in FY15). Repco reported a CAGR of 30% for four years ending FY15, increasing its loan book to Rs 6013 crore in FY15. In a slowing housing loan market, one of the biggest challenges lay in addressing accretion of non-performing assets. Along with Gruh, Can Fin continues to fully provide for the NPAs (provision coverage at 100%) and as a result the net NPA is nil. The other companies in the housing industry like Dewan, Repco and LIC housing reported the Net NPA of 0.7%, 0.5% and 0.2% respectively as on March The housing finance companies have seen a fall in the return ratios like ROE and ROA in FY15. While companies like LIC Housing, Repco and GIC Housing noted a slight fall in their ratios, Can Fin reported a higher decline of 3.8% in ROE (from 17.9% in FY14 to 14.1%) for FY15. The net interest income of Dewan Housing stood at Rs 1331 crore registering a robust growth of 39.9% for year The key challenges facing these housing finance companies to overcome the supply side constraints are sourcing of long term bulk finance at lower rates, institutional framework to deliver housing finance to economically weaker sections (EWS) and lower income group (LIG) section and leveraging on technology to achieve scale and reach in a cost effective manner. 6 6

7 Financials Quarterly Results Figures in Rs crs Q2FY16 Q2FY15 % chg. H1FY16 H1FY15 % chg. Net Interest Income Non Interest Income Total Operating Income Operating Expenses Pre-Provision Profits Provision PBT (incl extra ordinary items) Tax PAT Basic EPS (F.V.10) Equity Income Statement Figures in Rs crs FY13 FY14 FY15 FY16e FY17e Net Interest Income Non Interest Income Total Operating Income Operating Expenses Pre-Provision Profits Provision PBT (excl extra ordinary items) Exceptional items PBT Tax PAT EPS (F.V.10) * *Weighted Average shares 7 7

8 Balance Sheet Figures in Rs crs FY13 FY14 FY15 FY16e FY17e Sources Of Funds Shareholders Funds Share Capital Reserves and Surplus Non Current Liabilities Long Term Borrowings Long Term Provisions Deferred Tax Liabilities(net) Current Liabilities Short Term Borrowings Other Current Liabilities Short Term Provisions Application of Funds Non- Current Assets Tangible Assets Capital Work in Progress Non-Current Investments Long Term Loans and Advances Current Assets Cash and Cash Equivalents Short term loans and advances Other Current Assets

9 Key Financial Ratios FY13 FY14 FY15 FY16e FY17e Growth Ratios (%) Net Interest Income Total Operating Income Pre Provision Profits Net Profit EPS Loan Book Assets Under Management Return Ratios (%) ROE ROA Margins (%) Cost To Income Ratio Net Interest Margin (% of Loan Book) Asset Quality (%) Gross NPA Net NPA Valuation Ratios P/BV P/E Other Ratios Debt / Equity Current Ratio

10 Financial Summary US dollar denominated million $ FY13 FY14 FY15 FY16e FY17e Equity capital Shareholders funds Total debt Total loans and advances Investments Net current assets Total assets Net Interest Income Pre-provision Profits PBT PAT EPS($) Book value ($) *income statement figures translated at average rates; balance sheet at year end rates; projections at current rates All dollar denominated figures are adjusted for extraordinary items

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