Edel Invest Research
The CUB Series “Catch the CUB before it roars like a Lion”
CAN FIN HOMES LTD. Initiating Coverage (CMP INR 264)
Raj Gala
Sandeep Bhandari
+91-22-4088 6137
[email protected]
+91-22-4088 5630
[email protected]
May 2014
The CUB Series It is our pleasure to initiate coverage on CANFIN Homes Ltd. under the ‘CUB’ series. Under the ‘CUB’ series, we are covering small-cap companies with robust long-term growth potential. Our endeavour is to recommend smallcap companies with limited coverage owing to low liquidity and small business size. But, these companies have robust long-term fundamentals and sustainable structural growth drivers.
According to us, investment themes in equity markets play out over a long-term period and the potential payoffs take time to materialise. A number of multi-bagger stocks are still available in the Indian market across various sectors. Under the CUB series our goal is to identify quality small-cap companies in the early stages of significant growth cycle. Some of the important attributes of CUB series stocks are as under:
Small cap companies with robust long-term growth potential Steady cash flows, healthy balance sheets and return ratios Good corporate governance Not widely covered and liquidity could be an issue
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Can Fin Homes Ltd
CMP: INR 264; Target Price: INR 450
Can Fin Homes Ltd. (CANFIN) is a South India-based home financier focused on Tier 1 and Tier 2 cities. CANFIN’s customer profile comprises of low-risk loans for salaried individuals (92% of loans) and Loan Against Property (8% of loans) with an average LTV of 75-80%. The company primarily caters to the medium ticket size segment (average ticket size INR 17 lakh). CANFIN’s fundamentals have improved considerably since the new Managing Director (MD) took charge with NPAs declining to 0.2% vs 1.1% in FY11 and loan book expanding at 40% CAGR in last 3 years vs 18% CAGR in last 10 years. The company is an attractive play (P/ABV of 0.9x FY16E), given its improving return ratios, strong asset quality and aboveindustry loan growth.
Target (INR)
Peer valuation
450
Upside/downside (%)
70
TTM P/E
P/B
REPCO
24.3
3.6
GRUH
36.9
10.2
Rating
Buy
LIC Housing
12.5
2.2
CMP
272
Industry/Key Products
Housing Finance
278 / 102
Promoter Brief Profile
CANARA Bank
52 week high/low Market cap (INR crore)
531
Avg. Daily Vol (‘000)
Primary location
50
Bloomberg code
Bangalore
Auditors
CANF:IN
KP Rao & Co.
Credit rating
CARE: AA+
Investment Theme Niche presence in metro and non-metro markets
Mar-14
Dec-13
Sep-13
42.38
42.38
42.38
Promoter
Faster turnaround time - key competitive advantage
FII
0.62
0.62
0.62
Loan book to grow ahead of industry average
DII
0.26
0.51
0.51
56.74
56.49
56.49
Others
Best in class asset quality
160
120
44
54
75
94
116
169.6
191.4
220.4
256.9
301.8
21.4
26.3
36.5
45.9
56.5
80
Gross NPA ratio (%)
0.7
0.4
0.2
0.3
0.3
60
Net NPA ratio (%)
0.0
0.0
0.0
0.0
0.0
1.2
1.1
0.9
10.4
7.5
6.0
4.9
ROAE (%)
13.3
14.6
17.7
19.2
20.2
ROA (%)
1.8
1.6
1.5
1.5
1.5
Can Fin
Apr-14
1.4
12.8
Mar-14
1.6
Price/Earnings (x)
Feb-14
Price/Adj. book value (x)
Jan-14
Diluted EPS (INR)
100
Dec-13
Adjusted BV per share (INR)
Nov-13
226
Oct-13
183
Sep-13
137
Aug-13
96
Jul-13
84
140
Jun-13
FY16E
May-13
FY15E
Apr-13
FY14
Mar-13
Net profit after tax
FY13
Feb-13
Net int. income
FY12
Jan-13
Attractive valuations
Sensex
Source: Edel Invest Research. 3
Can Fin Homes Ltd: Investment Rationale Niche presence in metro and non-metro markets CANFIN is a play on the high-growth Indian housing finance industry, which is driven by growing urbanization, rising income levels, low penetration of housing finance and shortage of houses. The company has created a niche for itself by focusing on low-ticket loans (average ticket size INR 17 lakh) in Tier 1 & Tier 2 cities, as operating hassles and cost compulsions prevent banks from entering this segment. CANFIN is aiming to tap this opportunity with a direct marketing approach and through DSA’s. It has 85 company-owned branches spread across Tier 1 & Tier 2 cities. The company’s loan book has grown at a CAGR of 26% over the past five years. Going forward, we expect PAT to grow at 25% CAGR over FY14-16E led by robust loan growth.
Faster turnaround time - key competitive advantage CANFIN has been able to achieve faster turnaround times owing to its robust loan origination system, which allows real-time transmission & review of loan applications with a personalized focus at any point in time. We believe that faster turnaround time right from loan origination (as fast as 2-3 weeks) to the release of deed has provided the company with a competitive edge, which it can leverage to increase its customer base. Loan book to grow ahead of industry average CANFIN’s advances grew at a moderate pace of 19% CAGR over the past 10 years, mainly due to lack of focus. But since March 2011, under the leadership of Mr. C. Ilango (MD), CANFIN has aggressively expanded its loan book, recording a 40% CAGR in advances over FY11-14E. Sanctions have grown at 75% CAGR during FY11-14E while disbursements have grown by 76% CAGR. To tap the robust demand in the mortgage industry, CANFIN has added 42 branches to its network since FY11, compared with no branch addition in the last decade. Further, it plans to open 25 new branches over the next two years. The enhanced focus to expand balance sheet as well as branch network should help the company sustain the current loan book growth. We expect CANFIN’s loan book to grow at a CAGR of 20% over FY14-16E. Best in class asset quality As of FY14, CANFIN has GNPAs of 0.2%, nil NNPA and provision coverage of 100%. Focus on salaried class (92% of the total loan book) with average ticket size of INR 17 lakh, in-house credit & legal teams and LTV of 75-80% have enabled the company to maintain respectable asset quality over the years. The company has relentlessly focused of improving asset quality over the past three years. As a result, GNPA’s have improved from 1.4% in FY09 to 0.2% in FY14. Outlook & Valuations At 0.9x FY16E adjusted book and 4.9x FY16E earnings, we believe CANFIN is attractively priced compared to its peers, delivering sustainable RoE of around 18% and RoA of 1.5%. CAR of 13.8%, gross NPA of 0.2% and PCR at 100% make a strong case for the stock to trade at par to peer group valuations. We value CANFIN at 1.5x FY16E book value, arriving at a target price of INR 450 (upside potential of 70% plus dividend yield of 3.6%).
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Can Fin Homes Ltd: Financial Analysis ROAE to improve
NIMs to remain stable 2.5
20.0
2.0
15.0
1.5
10.0
1.0
5.0
0.5
0.0
0.0 2010
2011
2012
2013E
ROAE (%) (LHS)
2014E
2015E
(%)
(%)
25.0
35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0
2016E
30.2 19.4
(%)
40.0
30.0 20.0 10.0 0.0 Loan Book (LHS)
2014E
2015E
2016E
Loan Growth (%) (RHS)
1.2
0.0 2011
2012
2013
2014E
2015E
2016E
Net Interest Margins (%)* (Calculated)(RHS)
1.1
120
1.1
1.0
100 0.7
0.8 (%)
50.0
2013
3.0
Best in class asset quality 9000 8000 7000 6000 5000 4000 3000 2000 1000 0
2012
4.0
1.0
Loan book to grow at healthy pace
2011
30.1
22.1
Cost to Income Ratio(LHS)
60.0
2010
29.8
2.0
2010
ROA (%) (RHS)
22.2
31.5
80
0.6
60 0.4
0.4
0.2
0.3
0.3
0.2
40 20
0.0
0 2010
2011
2012
2013
GNPA (%) (LHS)
2014E
2015E
2016E
PCR (%) (RHS)
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Can Fin Homes Ltd: Business Overview & Risk Focused on individual salaried class 100
98
6 94
94
4
92
92
2
90 88
0 2010
2011
2012
2013
Housing Loans - Individuals/Staff (LHS)
2014E
Non Housing Loans (RHS)
Diversified borrowing profile
(%)
Concentration risk: 70% of loans are in South India, which presents concentration risk, in our view. CANFIN has been expanding outside the south region which will definitely bring in the much needed diversification.
Competition: NIMs may come under pressure if unable to pass on the pressure of increased funding cost.
97
96
Key Risks
Stability in Leadership: CANFIN’s current performance is driven by new MD Mr. Ilango who has joined in Mar 2011 and will be serving till FY16. Any change in leadership may impact future growth of the company.
8
98
98 (%)
CANFIN is a housing finance company registered with the NHB and headquartered in Banglore. It was promoted by Canara Bank in the year 1987 which owns 42.38% shareholding of Can Fin homes. It primarily finances the purchase of residential (salaried individual home loans) and commercial properties (loans against properties). As of March 2014, CANFIN had 83 branches located in Tamil Nadu, Karnataka, Andhra Pradesh, Kerala, Maharashtra, and Gujarat. Further, more than 80% of its branches are located in tier 1 and 2 cities. CANFIN enjoys a 5 star rating from the NHB for the purpose of refinance and an AA+ rating from CARE and ICRA for long-term financing from banks. five years.
80 70 60 50 40 30 20 10 0
68
63
61
52
51 44 29
28 11
2010
26
8 2011 NHB
41
6 2012 Bank Loans
5 2013
7 2014E
Deposits
6
Can Fin Homes Ltd: Peer Comparison Attractive Valuations At 0.9x FY16E adjusted book and 4.7x FY16E earnings, we believe CANFIN is attractively priced compared to its peers, delivering sustainable RoE of around 18% and RoA of 1.5%. CAR of 13.8%, gross NPA of 0.2% and PCR at 100% make a strong case for the stock to trade at par to peer group valuations. We value CANFIN at 1.5x FY16E book value, arriving at a target price of INR 450 (upside potential of 70% plus dividend yield of 3.6%).
Peer Comparison (FY16E) CMP Salaried Class (%) EPS (FY16E) Book Value (FY16E) P/E (x) FY16E P/ABV (x) FY16E Loan Book (INR crs) NIMs GNPA (%) NNPA (%) Cost to Income ratio (%) ROAs (%) ROAEs (%) Provision/assets (%)
CANFIN 265 92 57 302 4.7 0.9 8421 2.9 0.3 0 30.1 1.5 20.2 0.1
GRUH 344 63 15 50 23.0 6.9 10805 4.4 0.4 0 22 2.8 33 0.1
REPCO 426 46 28.5 159 15.1 2.7 7488 4.6 2 1.3 16 2.8 19.1 0.4
HDFC 941 85 63 295 14.9 3.2 192300 3.3 0.7 0 7.8 2.7 23 0.1
LIC Housing 322 85 35.9 196.1 8.9 1.6 125931 2.3 0.7 0.4 17.3 1.6 19.2 0.1 7
Can Fin Homes Ltd: Financial Overview Income Statement (INR Cr) Interest Income Interest Expenses Net Interest Income Other Income Net Total Income Provision for Employees Operating Expenses Depreciation Total expenses Pre Provision Profits Provisions and Contingencies Net Profit Before Tax Provision for Tax Adjusted Net Profit After Tax EPS (INR)
FY12 279 196 84 8 91 11 9 1 20 71 10 61 18 44 21.4
FY13 379 283 96 14 110 16 16 2 33 77 2 75 20 54 26.3
FY14 FY15E FY16E 560 733 857 423 550 631 137 183 226 17 20 23 154 203 250 18 22 28 29 36 45 2 2 2 49 60 75 106 143 175 0 14 16 106 129 159 31 35 43 75 94 116 36.5 45.9 56.5
Operating Ratio's (%) Other Income /Total Income Interest Expe / Interest Earned Yield on Advances Cost of Funds Interest Spread Net Interest Margins (Calc) Return on Average Equity Return on Assets Cost to Income Operating Expen / Assets Tax Rate (%)
FY12 2.7 70.0 11.6 8.0 2.1 3.46 13.3 1.8 22.1 0.8 29
FY13 3.6 74.7 11.5 8.6 1.8 2.91 14.6 1.6 30.2 0.8 27
FY14 FY15E FY16E 2.9 2.6 2.7 75.5 75.0 73.6 11.4 11.4 11.1 8.7 8.6 8.2 1.9 1.9 2.0 2.82 2.87 2.95 17.7 19.2 20.2 1.5 1.5 1.5 31.5 29.8 30.1 0.8 0.9 0.9 27 27 27
Growth Metrics (%) Net Interest Income Total Expenses Pre Provision Profits Net Profit After Tax
FY12 16.1 17.4 18.7 4.2
FY13 14.4 64.3 7.6 23.2
FY14 FY15E FY16E 43.4 33.7 23.3 46.9 24.4 24.5 37.9 0.0 0.0 38.6 25.8 23.1
Balance Sheet (INR Cr) SOURCES OF FUNDS Share Capital Total Reserves Networth Deposits Borrowings Other Liabilities & Provisions TOTAL LIABILITIES APPLICATION OF FUNDS Cash & Bank Balances Net Investments Loans and Advances Fixed Assets Current Assets Current Liabilities Net Current Assets Net Deferred Tax Assets TOTAL ASSETS
FY12
FY13
FY14E
FY15E
FY16E
20 327 348 80 2220 15 2662
20 372 392 75 3463 14 3945
20 431 452 158 5111 89 5810
20 506 526 174 6133 197 7030
20 598 618 191 7360 267 8436
16 17 2636 3 38 54 -15 6 2662
9 16 3978 7 36 104 -68 5 3945
9 15 5848 8 44 118 -75 5 5810
35 35 7018 9 48 130 -82 5 7030
25 42 8421 10 53 143 -90 5 8436
Balance Sheet Ratio Loan Growth (%) Disbursement Growth (%) Repayment (%) Gross NPA (%) Net NPA (%) Provision Coverage (%)
FY12 21.1 81.6 18.3 0.72 0.0 100.0
FY13 50.9 111.2 17.9 0.40 0.0 100.0
FY14E 47.0 42.4 17.9 0.20 0.0 100.0
FY15E 20.0 2.0 25.1 0.25 0.0 100.0
FY16E 20.0 20.0 25.1 0.29 0.0 100.0
Valuation Metrics Price To Earnings (P/E) Diluted EPS (INR) EPS Growth (%) No.of Shares in Crores DPS (INR) Dividend Payout (%) Dividend Yield (%) Book Value (INR) Price to Book Value Adjusted Book Value (INR) Price to Adjusted Book Value
FY12 12.8 21.4 4.2 2.0 3.0 14.0 1.1 169.6 1.6 169.6 1.6
FY13 10.4 26.3 23.2 2.0 4.0 15.2 1.5 191.4 1.4 191.4 1.4
FY14E 7.5 36.5 38.6 2.0 6.4 17.5 2.3 220.4 1.2 220.4 1.2
FY15E 6.0 45.9 25.8 2.0 8.0 17.5 2.9 256.9 1.1 256.9 1.1
FY16E 4.9 56.5 23.1 2.0 9.9 17.5 3.6 301.8 0.9 301.8 0.9
Dupont Analysis (% of average assets) Interest income Interest expense Net interest income Fee Income Non interest income Total Income Employee cost Other cost Operating costs Preprovisions profit Provisions Pretax profit Tax Net Profit (ROA) Leverage (equity/assets) ROAE
FY12 11.4 8 3.4 0.3 0.3 3.7 0.4 0.4 0.8 2.9 0.4 2.5 0.7 1.8 7.4 13.3
FY13 11.5 9 2.9 0.4 0.4 3.3 0.5 0.5 1.0 2.3 0.1 2.3 0.6 1.6 8.9 14.6
FY14E 11.5 9 2.8 0.0 0.3 3.2 0.4 0.6 1.0 2.2 0.0 2.2 0.6 1.5 11.6 17.7
FY15E 11.4 9 2.9 0.0 0.3 3.2 0.3 0.6 0.9 2.2 0.2 2.0 0.5 1.5 13.1 19.2
FY16E 11.1 8 2.9 0.0 0.3 3.2 0.4 0.6 1.0 2.3 0.2 2.1 0.6 1.5 13.5 20.2
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Disclaimer Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 40094606,
Nitin Jain
Head – Business Capital Markets (Individual Clients Group)
[email protected]
+91 (22) 4088 5618
Vinay Khattar
Head – Research Capital Markets (Individual Clients Group)
[email protected]
+91 (22) 4088 6023
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