Visit us at www.sharekhan.com December 04, 2012 Reco: Buy Turning over a new leaf CMP: Rs134 Price target: Market cap: Public & others 53% Company details 52-week high/low: NSE volume: (no. of shares) Foreign 1% Promoter 42% MF & FI 4% Rs220 Rs287 cr Rs147/88 0.4 lakh BSE code: 511196 NSE code: code: Free float: (no. of shares) 150 135 120 105 90 75 Dec-11 Shareholding pattern Mar-12 Price chart Jun-12 Price performance CANFINHOME CANFINHOME Sep-12 1.2 cr Dec-12 (%) 1m 3m 6m 12m Absolute 8.1 30.5 33.9 46.6 Relative 5.0 17.2 9.5 25.7 to Sensex Key points Turning to growth path: For (CanFin), a housing finance company sponsored by Canara Bank, the financial year 2012 marked a distinct change in strategy and financial performance. Notwithstanding its historical sluggish growth at 7.8% CAGR over FY2001-10, the company s sanctions and disbursements grew by 81.7% and 102.6% respectively in FY2012. The FY2012 performance is not a flash in the pan. The company s renewed focus on growth and the recent aggressive expansion of its branch network have put it on a high growth path for the next few years. CanFin has added 25 branches since March 2011 which amounts to an increase of close to 60% in its current branch network of 66 outlets. Consequently, we expect the company s disbursement to grow at about 60% CAGR resulting in a 38% CAGR in the loan book over FY2012-14. Favourable geographic presence; sustainable margins: In addition to its aggressive expansion, the company s favourable geographical presence augurs well. The volume offtake has improved significantly in the southern realty markets especially around Bangalore, where CanFin has a strong presence (16% of its branches in Bangalore and 65% in south India). The company s branches are strategically located (outside cities) and serve customers requiring relatively smaller loans (of below Rs10 lakh), which are eligible for interest subvention. Further, the company gets refinancing from the National Housing Board (NHB) at competitive rates due to lending in semi-urban rural areas (that account for about 40% of its loan book). Thus, we expect CanFin s net interest margin (NIM) to sustain at over 3% going ahead. Robust asset quality and comfortable capital position: Despite a weak macroeconomic environment the asset quality of the company remains strong as its gross NPAs were a meagre 0.9% of the advances and its net NPAs were nil in FY2012. This is mainly possible due to stringent credit appraisals (customer referrals preferred) and efficient recoveries. The capital adequacy ratio as of Q2FY2013 is 15.44% (17.44% in FY2012) against the minimum requirement of 12%. According to the management, the current capital will suffice till FY2014. Valuations Particulars FY2010 FY2011 FY2012 FY2013E FY2014E NII (Rs cr) 62.9 72.1 83.7 101.5 131.5 PPP (Rs cr) 54.0 60.0 68.3 80.1 105.5 PAT (Rs cr) 39.2 42.0 43.8 52.7 69.1 EPS (Rs) 19.1 20.5 21.4 25.7 33.7 EPS growth (%) 24.3 7.2 4.2 20.4 31.1 BVPS (Rs) 134.2 151.8 169.7 190.9 218.7 P/BV (x) 1.0 0.9 0.8 0.7 0.6 P/E (x) 7.0 6.5 6.3 5.2 4.0 NIM (%) 3.2 3.4 3.5 3.2 3.0 RoE (%) 15.0 14.3 13.3 14.3 16.5 RoA (%) 1.9 1.9 1.8 1.7 1.6 Dividend yield (%) 1.5 1.9 2.2 2.9 3.8
Valuation discount unjustified, improving return ratios could narrow valuation gap: Even as the other bank-sponsored housing finance companies are either posting losses or merging with their banks, CanFin continues to show a strong performance. However, its stock trades at a modest valuation of 0.6x FY2014E book value, which is a 40-50% discount to its nearest peer, GIC Housing Finance, which trades at 1.1x FY2014E book value. Going ahead, due to a pick-up in disbursement and increase in leverage the return on equity (RoE) is likely to move up to 16.5% by FY2014 from about 13.3% in FY2012. This should improve the valuations. We believe the operational performance and return ratios of CanFin are improving which should lead to a re-rating of the stock. We value the company at 1x FY2014E book value and initiate coverage on it with a Buy recommendation and price target of Rs220. Company background CanFin is a housing finance company sponsored by Canara Bank. It was set up in 1987. The company offers a range of products on housing, such as loans for home purchase, home construction, home improvement/extension and site purchase as well as non-housing finance. It has 66 branches of which 65% is based in south India. As of Q2FY2013, the company has a loan book of Rs3,200 crore. CanFin enjoys a 5-Star rating from the NHB for the purpose of refinance and an AA+ rating from CARE for long-term financing from banks. Most of its branches are located outside cities and mainly cater to customers requiring relatively smaller loans (of up to Rs10 lakh) that are also eligible for interest subvention. Geographical distribution of branches 80 70 60 50 40 30 39 39 40 41 Break-up of individual loans 52 Rolling out new branches to fuel business growth CanFin s branch expansion remained stagnant while its loan growth was tepid at 1.0% compounded annual growth rate (CAGR) over FY2003-11. This was largely due to a lack of focus on growth. However, the management has clearly outlined the growth plans for future and these involve a ramp-up of the branch network and expansion of the loan book. By the end of FY2013 the company s branch tally is slated to increase to 70 (66 branches till Q2FY2013). We believe the increase in the number of branches will support the stronger growth in disbursements. Branch network 100% 75% 50% 25% FY08 FY09 FY10 FY11 FY12 FY13E FY14E 30.7% 34.2% 69.3% 65.8% 70 75 42.2% 57.8% 0% FY10 FY11 FY12 Up to Rs15 lakh Above Rs15 lakh Source: Company Strong focus on individual segment About 98% of the company s loans is in the individual segment (salaried and self-employed) and about 2% is in the corporate segment. CanFin has a unique referral-based sourcing approach whereby the existing customer is incentivised for referring new customers. Further, the company has a significant presence in the growing markets of southern India (65% of its branches in south India and 16% around Bangalore). Going ahead, the company plans to grow strongly in the retail segment, which has a strong growth potential. 2 December 2012
Loan mix 100% 1.2% 1.3% 1.4% 1.4% 1.3% 1.3% 1.2% 99% Borrowings funding profile rated as MAA+ by ICRA, indicating its high credit quality. Further, the term loans from banks also command a higher rating (AA+ from ICRA) allowing it to borrow at competitive rates. 98% 97% 97.8% 98.1% 98.4% 98.5% 98.7% 98.7% 98.8% FY08 FY09 FY10 FY11 FY12 FY13E FY14E Housing loans Non-housing loans OD from banks 2% Deposits 6% Others 1% Branch break-up Term loans 65% Loans from NHB 26% South 64.6% East 4.6% West 12.3% North 18.5% Operating performance to improve The core income of the company (the net interest income) grew at an average of 15% CAGR over FY2008-12. We expect the same to grow at 26% CAGR over FY2012-14. The growth would be driven by a strong rise in disbursements. Though the NIM has declined owing to a reduction in lending rates, the margin could stabilise going ahead due to the possible easing of the interest rate scenario. Going ahead, we expect the company s net earnings to grow at 26% CAGR leading to an improvement in the RoE and return on asset (RoA) to 16.5% and 1.6% respectively by FY2014. High credit rating strengthens funding profile CanFin relies on banks (67% of its total borrowings) and the NHB for funding. During FY2012 the company refinanced Rs595.2 crore (26% of its total borrowings) from the NHB. Due to a higher proportion of lending in the semi-urban and rural areas (about 40% of the disbursements), the company gets refinancing from the NHB at competitive rates. In addition, CanFin largely focuses on long-term borrowings with an average tenure of seven to ten years due the relatively higher tenure of its assets. The deposits of the company continue to be Trend in capital adequacy ratio Robust asset quality CanFin s asset quality remains robust as the gross nonperforming assets (NPAs) were merely 0.9% of its loans while the net NPAs were nil in FY2012. When compared with the peer companies (GIC Housing Finance and Dewan Housing Finance), the asset quality of CanFin is much superior. Going ahead, due to stringent lending practices and strong recovery framework we expect the asset quality of the company to remain strong. Attractive dividend yield; comfortable capital position The company s dividend yield is around 3% based on the current market price while the pay-out ratio is maintained at around 15%. The capital adequacy ratio as of Q2FY2013 is 15.44% (17.44% in FY2012) against the minimum requirement of 12%. According to the management, the current capital will suffice till FY2014. We believe the capital cushion is likely to foster a growth in advances in the coming years. 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 17.1% 19.1% 17.4% 14.4% 12.0% FY10 FY11 FY12 FY13E FY14E 3 December 2012
Valuation discount unjustified, improving return ratios could expand valuations Even as several other bank-sponsored housing finance companies are posting losses or merging with their banks, CanFin continues to show a strong performance. Due to a pick-up in disbursements and increase in leverage, its return ratios are likely to move up to 16.5% by FY2014 from about 13% in FY2012. This should improve the valuations. Currently, the stock is trading at 0.6x FY2014E book value, that is a 40-50% discount to its nearest peer, GIC Housing Finance, which trades at 1.1x FY2014E book value. We believe the operational performance and return ratios of CanFin are improving which should lead to a rerating of the stock. We value the company at 1x FY2014E book value and initiate coverage on it with a Buy recommendation and price target of Rs220. One-year forward PBV standard deviation band 1.2 1.0 0.8 0.6 0.4 0.2 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 PBV Avg PBV +2sd +1sd -1sd -2sd Source: Research, Bloomberg Comparative analysis Particulars BVPS (Rs) RoA (%) RoE (%) P/BV (x) CAR (%) FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 170 191 219 1.8 1.7 1.6 13.3 14.3 16.5 0.8 0.7 0.6 17.4 GIC Housing Fin.* 92 103 115 1.5 1.5 1.6 12.3 13.1 13.8 1.0 1.2 1.1 14.8 Gruh Housing Fin.* 22 63 78 3.1 3.0 3.1 34.2 32.6 33.1 5.8 3.3 2.7 14.0 Dewan Housing Fin.* 173 195 230 1.3 1.4 1.4 18.1 17.9 18.2 1.4 1.0 0.9 18.2 Source: Research, *Bloomberg consensus 4 December 2012
Financials Profit & Loss statement Rs cr Net interest income 62.9 72.1 83.7 101.5 131.5 Other income 8.6 5.0 7.6 9.1 12.6 Operating expenses 17.4 17.2 23.0 30.5 38.6 Operating profit 54.0 60.0 68.3 80.1 105.5 Provision (0.8) 1.5 7.4 6.9 9.5 PBT 54.8 58.5 61.0 73.2 96.0 Tax 15.6 16.5 17.2 20.5 26.9 PAT before EO 39.2 42.0 43.8 52.7 69.1 Balance sheet Rs cr Liabilities Equity capital 20 20 20 20 20 Reserves & surplus 254 290 327 371 428 Net worth 275 311 348 391 448 Borrowings 1,865 1,904 2,300 3,247 4,608 Current liabilities 52 60 68 77 87 & provisions Total liabilities 2,192 2,275 2,716 3,715 5,143 Assets Loans 2,098 2,202 2,634 3,624 5,042 Investments 17 17 17 17 17 Deferred tax asset 4 5 6 7 8 Current assets, 70 49 56 63 72 loans & advances Net block 3 3 3 4 5 Total assets 2,192 2,275 2,716 3,715 5,143 Key ratios Per share data (Rs) EPS 19.1 20.5 21.4 25.7 33.7 BV 134.2 151.8 169.7 190.9 218.7 ABV 134.2 151.8 169.7 190.9 218.7 DPS 2.0 2.5 3.0 3.9 5.1 Spreads (%) Yield on funds 10.5 10.5 11.5 11.3 11.1 Cost of funds 8.3 8.2 9.3 9.1 9.0 Net interest margins 3.2 3.4 3.5 3.2 3.0 Operating ratios (%) Interest expended/ 69.8 68.1 70.0 71.4 72.8 Interest earned Cost to income 24.4 22.3 25.2 27.6 26.8 Non-interest income/ 4.0 2.2 2.6 2.5 2.5 Total income Return ratios (%) RoE 15.0 14.3 13.3 14.3 16.5 RoA 1.9 1.9 1.8 1.7 1.6 Assets/Equity 8.0 7.3 7.8 9.5 11.5 Dividend yield 1.5 1.9 2.2 2.9 3.8 Growth ratios (%) Net interest income 23.3 14.7 16.1 21.2 29.7 PPP 21.6 11.1 13.9 17.2 31.8 PAT 24.3 7.2 4.2 20.4 31.1 Housing loans outstanding Advances 11.9 5.0 19.6 37.6 39.1 Borrowings 13.1 2.1 20.8 41.2 41.9 Disbursements 82.0 (13.6) 81.7 70.0 50.0 Valuation ratios (x) P/E 7.0 6.5 6.3 5.2 4.0 P/BV 1.0 0.9 0.8 0.7 0.6 P/ABV 1.0 0.9 0.8 0.7 0.6 Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. 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