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1 July 12, 2016 Can Fin Homes Ltd. No. of shares (m) Mkt cap (Rs crs/$m) 3243/483.0 Current price (Rs/$) 1218/18.1 Price target (Rs/$) 1488/ W H/L (Rs.) 1325/680 Book Value (Rs/$) 330/4.9 Beta 1.1 Daily volume (avg. monthly) P/BV (FY17e/18e) 3.2/2.6 P/E (FY17e/18e) 15.2/12.0 Cost to Income (FY16/17e/18e) 19.7/18.1/17.6 EPS growth (FY16/17e/18e) 42.6/36.2/26.0 NIM (FY16/17e/18e) 3.2/3.2/3.2 ROE (FY16/17e/18e) 19.0/22.6/23.9 ROA(FY16/17e/18e) 1.6/1.7/1.8 D/E ratio (FY16/17e/18e) 10.8/11.9/12.1 BSE Code NSE Code CANFINHOME Bloomberg CANF IN Reuters CNFH.BO Shareholding pattern % Promoters 43.5 MFs / Banks / FIs 0.6 Foreign Institutions 0.1 Govt. Holding - Public & Others 55.8 Total As on March 31, 2016 Recommendation BUY Phone: + 91 (33) E- mail: research@cdequi.com Company Brief CFHL offers a range of loan products, housing and non-housing loans. Canara Bank holds 43.45% of the company s equity capital. Quarterly Highlights Continuing its expeditious pace of business activity, Can Fin Homes notched 29.3% surge in its loan portfolio last fiscal, growing faster than the industry. The growth was galvanized by its high yielding non housing loan portfolio which escalated by 39.3%, while the housing loan portfolio moved up by 28.1%. For the housing loans, the average loan ticket size in the year was Rs lakhs (Rs lakhs in FY15) while for the non housing loans it was Rs 13 lakhs (Rs lakhs in FY15). With a massive growth of 65.9% (y-o-y) in the net interest income in the last quarter, CFHL managed to expand its NIMs to 3.2%- the highest in last 16 quarters, lowering down its cost to income ratio by 542 bps to 18.0% in Q4FY16. The profits in the last quarter more than doubled thanks to dual effect of lower cost of funds and fall in provisions. Competition with banks remains a concern as they have started shifting to a new pricing mechanism (MCLR). Interest rates could move southwards which would prop up the demand for housing loans. CFHL continues to stand out in precluding accretion to stress assets- GNPA of Rs crs (0.19%) as against Rs crs (0.17%) in FY15. In respect to the NPA accounts, the company made cash recovery of Rs 3.32 crs in FY16, while the recovery in written off accounts was to the extent of Rs 0.74 crs. The stock currently trades at 3.2x FY17e BV (15.2x FY17e EPS) and 2.6x FY18e BV (12.0x FY18e EPS). Notwithstanding its low loan book base, CFHL has consistently managed outclass most others in a fiendishly difficult housing finance industry-37% average growth in the last five years. That s reflected in awe aspiring resurrection in stock rating-p/bv of 3.5 in FY16 from just 0.6 in FY12. Other measures of profitability improved too-cost to income, NIM, ROE to name a few. Yet risk of dynamic shifts in NIMs resulting either from rising cost of funds or pressure on lending rates cannot be sorely undermined. Loan book growth also risks facing a deceleration-absolute additions flat lined last fiscal- inciting investors trepidation. On balance, we assign a buy rating with a revised target of Rs 1488 (previous target: Rs 1206) based on 3.2x FY18e BV for a period of 9-12 months. Figures (Rs crs) FY14 FY15 FY16 FY17e FY18e Net Interest Income Non Interest Income Pre-Provision Profits Adjusted Net Profit EPS (Rs) EPS growth (%) Equity capital

2 [ CD Equisearch Pvt Ltd Outlook & Recommendation Industry Overview The launch of Housing-For-All by 2022 scheme in 2015 heralded a new era in the housing finance sector. It gave a muchneeded boost to the real estate and housing finance industry by creating an enabling and supportive environment for expanding credit flow and increasing home ownership. Currently, about 7% of the nation's GDP is contributed by real estate sector, which is estimated to increase to about 13% by It is expected that the market size of the Indian real estate is to increase at a CAGR of 15.2% between FY The market value of the industry stood at US$ 93.8 bn as in H1FY15 and is projected to reach US$ 180 bn by FY20 and US$ 853 bn by FY28. NBFCs have turned out to be the engines of growth and are an integral part of the Indian financial system, enhancing competition and diversification in the financial sector. It has scripted a great success story as its contribution to the economy has grown from 8.4% in FY06 to above 14% in FY16 (13% in FY15) which is much lower as compared to that of economies such as Malaysia and China at 20%-30% (see chart below). Such a situation in India is undoubtedly an opportunity for the Indian NBFCs to contribute more to the nation's GDP in the near future. The latent credit demand of an emerging India will allow NBFCs to fill the gap, especially where traditional banks have been wary to serve. NBFC is expected to account for 17.1% of the total credit in the system by FY20 up from 13.8% in FY15 and 9.4% in FY16 (Source: India Ratings) (see chart). The keen focus of the housing finance companies is on the affordable housing segment. They are at the forefront in catering to the financial needs of the under-banked masses in the rural and semi-urban areas through strong linkages with these segments. The year 2015 saw launch of new campaigns by HFCs to raise awareness about the home loans and innovative new products for the customers in the low income bracket. Keeping customer benefit and convenience in mind, HFCs added special features to their products such as the Over-Draft facility, enabling borrowers to earn optimal yield on their savings by reducing interest burden on home loans. It is expected that HFCs will grow at 13-15% while mid size and regional HFCs will continue at 8-10% higher than the industry average this year. With the notification by the Finance Ministry, 41 housing finance companies are now approved under The Securitization and Reconstruction of Financial and Enforcement of Security Interest Act (SARFESAI) which is a significant step towards bringing HFCs at par with banks by enabling speedier loan recovery. One may also witness closer coordination between NHB and RBI to regulate, develop and meet the capital requirements of HFCs so that the purpose of disbursing finance at affordable rates for housing can be achieved instead of just growing outstanding loan book. Yet, with banks shifting to a new loan pricing regimethe marginal cost of funds based lending rate (MCLR), the fall in the home loan rate will be a challenge for housing finance companies. 2 2

3 Loan Portfolio Assets accretion gathered pace last fiscal as Can Fin reported an industry beating 29.3% growth in its loan book to Rs crs ($1585.2m) from Rs 8231 crs ($1225.9m) in FY15. The continuous thrust to increase the share of high yielding non housing loan in the loan mix (1.5% in FY11 vs 12% in FY16) bolstered the book size. In terms of distribution, 80% of the total loans belonged to the salaried and professional class, while 19% was accounted by the non-salaried class. CFHL concentration has been uncustomarily on retail lending as the small to medium ticket loan book amounted to Rs crs ($1574.1m) while the big ticket loans (outstanding > Rs 1 cr) amounted to Rs 74 crs ($11m). The business is mainly dominated by the South Indian market which accounts for 76% of the total sanctions. In the last fiscal year, CFHL sanctioned housing loans and other loans to the extent of Rs 4418 crs ($658.0m) with a growth of 20.4% while the amount of disbursed loans grew by 17.2% to Rs 3923 crs ($584.3m) despite slowdown in the real estate and high interest rate scenario. It was achieved by a steady increase in branch network across all area of operations. With increased focus on qualitative credit growth and its commitment to serve the middle income class to a greater extent, we expect the loan book to grow at a CAGR of 25.5% over the next two years to Rs crs ($2013.1m) and Rs crs ($2496.3m) in FY17 and FY18 respectively. Optimizing Cost of Funds Can Fin continues to diversify its borrowing basket total borrowings aggregated to Rs 9478 crs ($1411.6m) in FY16 as against Rs 7375 crs ($1098.3m) in FY15 (growth of 28.5%-well complementing its loan book growth). It has started mobilizing resources, strengthening its fund base through the issue of commercial papers and NCDs (34% of the mix) replacing bank borrowings whose proportion has reduced to more than half from 58% in FY07 to 27% in FY16 (31% in FY15) (see chart below). During last year, it availed loans from rural housing fund of Rs 400 crs ($59.6m) at a cost of 6.9%. Thanks to cheap financing from NCDs/CPs (avg funding cost of 7.3%) with strong AAA/A1+ ratings the average cost of funds has declined from 10.1% in FY13 to 8.8% in FY16, realizing a jump in interest spread of 100 bps (2.5% vs 1.5%). 3 3

4 Asset Quality One of the biggest challenges under pinning the Indian housing finance sector is the rising of nonperforming assets which has stayed quite congenial at 0.7% last fiscal year. CFHL continues to outhustle its industry with GNPA of 0.2% in FY16-perhaps lowest in the industry and Net NPA at nil (for last six years) at provision coverage of 100% which is a feat not many HFCs can claim to have. The nonperforming assets have been coming down impressively back from FY07 when the GNPA stood at 1.6%. Though the asset quality has been remarkable over the years, the portfolio vulnerability with increasing share of non salaried people (14% in FY15 vs 19% in FY16) must not be overlooked. Financials and Valuation The ability to amplify its loan book coupled by the diversification in the borrowing mix has fostered Can Fin s net interest income - Rs crs ($44.8m) in FY16 as against Rs crs ($26.5m) in FY15. The incessant reduction in the cost of funds helped it to realize a healthy net interest margin of 3.2% (2.5% in FY15) which translated into probably the highest NII growth in the history (69.4%). With the likelihood that the company will continue to sustain its margins (3.2% in FY17-18) by funding at prudent cost, we expect NII to grow at a CAGR of 27.1% to Rs crs (58.3m) in FY17 and Rs crs ($72.3m) in FY18. Over the years, CFHL has seen shrinkage in cost to income ratio which declined by 702 bps to 19.7% in FY16 that has partially helped the bottom line to grow at 82.5% to Rs crs ($23.4m) as against Rs crs ($12.8m) in FY15. With tight control on operating cost and expansion in interest spread, we expect the profits to grow by 36.2% to Rs crs ($31.8m) in FY17 and by 26.0% to Rs crs ($40.1m) in FY18. CFHL maintained CAR of 20.7% in FY16 (18.4% in FY15) which is well above the regulatory requirement of 12% as prescribed by NHB. With growing asset base, the return ratios have also shown noteworthy improvement. The company reported an ROE of 19.0% (14.1% in FY15) and ROA of 1.6% (1.2% in FY15) last year and is expected to further improve to 22.6% and 1.7% respectively in FY17. The stock currently trades at 3.2x FY17e BV (15.2x FY17e EPS) and 2.6x FY18e BV (12.0x FY18e EPS). Notwithstanding its low loan book base, CFHL has consistently managed outclass most others in a fiendishly difficult housing finance industry-37% average growth in the last five years. That s reflected in awe aspiring resurrection in stock rating-p/bv of 3.5 in FY16 from just 0.6 in FY12. Yet risk of dynamic shifts in NIMs resulting either from rising cost of funds or pressure on lending rates cannot be sorely undermined. Loan book growth also risks facing a deceleration-absolute additions flat lined last fiscal- inciting investors trepidation. On balance, we assign a buy rating with a revised target of Rs 1488 (previous target: Rs 1206) based on 3.2x FY18e BV for a period of 9-12 months. For more info refer to our December report. 4 4

5 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. Slowdown in Real Estate Sector Adverse developments in the real estate sector causing delay and default in completion of projects may cause a setback to disbursement of new loans. With pressure on both the demand and supply side, residential real estate has gone into a vicious cycle of increasing cost, falling demand, liquidity crunch and, delay in approvals adding to the woes of the developers. Stiff Competition Spurt in competition- intensive fight for market share between HFCs and Commercial Banks within the same space- can heighten the risk profile with aggressive underwriting standards. Over reliance on aggressively disbursing loans as an easier option to build loan book size, and squeezing margins to undesirable levels are other areas of possible threats. Moreover with the new methodology (MCLR) that has come into effect from April 1, 2016, the ability to hold on to higher base rates by banks despite of RBI slashing rates will be curtailed. Cross Sectional Analysis Company Equity* CMP Mcap* NII* Profit* NIMs (%) Loan Book growth(%) LICHF Gruh Dewan Repco GIC Can Fin *figures in Rs crore, all figures in ttm basis ROE (%) ROA (%) P/E P/BV Note: All $ values expressed in the write up (Financials & Cross sectional) are translated at current exchange rate. 5 5

6 The loan book growth for housing finance companies have been striking in FY16 with Can Fin Homes reporting the highest growth of 29.3% (industry average of 17%) among its peers, followed by Repco Home finance at 27.9%. Although LIC Housing managed to add the most to its loan book (absolute basis) last fiscal, its loan book grew by the slowest pace compared to other housing finance companies (15.5%). Notwithstanding Can Fin s smaller loan book portfolio, it has been able to outplay its competitors and the industry for the last three years (46% in FY14, 41% in FY15 and 29% in FY16). It trounced the second fastest growing housing finance company by a compelling margin in last three years- 2.65x for Can Fin; 2.17x for Repco- thanks to the near fourfold rise in its non salaried portfolio (2.4x for Repco). It also reported a massive growth in NII at 69.4% while other housing finance companies sailed around 20-30% growth. Dewan, Gruh and Repco reported stable margins last year at 3%, 4.2% and 4.4% respectively, while LIC and CFHL showed expansion in the margins. Sharp fall in cost of funds explains much of their peppiness in margins. Can Fin s average cost of funds slid by 80bps to 8.75%-the lowest in five years; while for LIC it fell by 50 bps. Unlike the other players, robust NPA provisioning helped both Gruh and Can Fin to post near zero/zero net NPA. In FY15, the industry saw a decline in the return ratios while FY16 saw a turnaround with all housing companies experiencing high ROE. Gruh registered an ROE of 31.5% while GIC and LIC reported ROE of 17.9% and 19.6% respectively. While companies like Dewan, Gruh and Repco noted a slight fall in its ROA, Can Fin announced an increase in ROA of 1.6% from 1.2% in FY15. Some of the key challenges facing these housing finance companies to overcome the demand-supply 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 Q4FY16 Q4FY15 % chg. FY16 FY15 % chg. Net Interest Income Non Interest Income Total Operating Income Operating Expenses Pre-Provision Profits Provision PBT Tax PAT Extraordinary items Adjusted Net Profit Basic EPS (F.V.10) Equity Income Statement Figures in Rs crs FY14 FY15 FY16 FY17e FY18e Net Interest Income Non Interest Income Total Operating Income Operating Expenses Pre-Provision Profits Provision PBT Tax PAT Extraordinary items Adjusted Net Profit Basic EPS (F.V.10) * Equity *Weighted Average shares (equity was raised at the end of FY15) 7 7

8 Balance Sheet Figures in Rs crs FY14 FY15 FY16 FY17e FY18e 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 Cash Flow Statement Figures in Rs crs FY14 FY15 FY16 FY17e FY18e Net Profit (a) Non cash expense & others (b) Depreciation Interest received on SLR deposits Bad debts written off Provisions Deferred tax Others Adjustments in NWC (c ) Current assets Current Liabilities Net Cash flow from Operations (a+b+c) Purchase of fixed assets Sale of fixed assets Net Investments Interest received Net Cash Flow from Investing activities (d) Issue of shares Net borrowings Net loans & advances Dividends paid Net Cash flow from Financing activities (e) Net change (a+b+c+d+e)

10 Key Financial Ratios FY14 FY15 FY16 FY17e FY18e 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

11 Cumulative Financial Data Rs crs FY07-09 FY10-12 FY13-15 FY16-18 NII Pre-provision profits PBT PAT Dividends Loan Book Total debt NII growth (%) Loan Book growth (%) Cost to Income (%) NIM (%) ROE (%) ROA (%) Dividend payout ratio (%) FY07-09 implies three year ending fiscal 09; Loan Book and total debt at terminal year. The loan book of Can Fin at the end of FY18 is expected to see nearly nine fold increase as compared to the loan book size in FY09 which is well complemented by the increase in its total debt (9.1x). The company s determination to increase its interest spread will enable it to achieve nearly 7.9x increases in cumulative NII during the period FY16-18 from that in FY07-09 period (see above table). The cumulative NII is expected to grow to a massive 189.1% in the three year period FY16-18 from the previous three year period which will be backed by robust credit growth and sharp expansion in margins (3.1% vs 2.5%). The performance has been soaring for the company in the last few years, with slight exception in FY13 when the NII grew by just 14.3% in spite of loan book growing at 50.2%-not least due to slump in NIMs resulting from downward pressure on lending rates. Cost to income ratio ballooned to 28.6% in FY13-15 period savaged by hefty 746 bps rise in cost to income ratio to 32.8% in FY13- the highest in a decade. Brawny growth in the loan book in FY13-15 saved blushes for the NIM inexorably fell from 3.4% in FY12 to 2.5% in FY15. That also showed up on sobering return on capital ratios - ROE plunged by 100 bps to 12.9% in FY13-15 and ROA shed weight by 50 bps

12 Financial Summary US dollar denominated million $ FY14 FY15 FY16 FY17e FY18e 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($) Book value ($) Operating Cash Flow Investing cash Flow Financing Flow *income statement figures translated at average rates; balance sheet and cash flow at year end rates; projections at current rates All dollar denominated figures are adjusted for extraordinary items

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