CANFIN HOMES

2 CANFIN HOMES RESEARCH REPORT

INSTITUTONAL EQUITY RESEARCH

APRIL 2015
CANFIN HOMES
Research Report_______________________
BUY
Quick Stats
Can Fin Homes Ltd (CFHL) ticks all the boxes that investors expect from
Housing Finance Companies. It has strong and rising NIMs, growing loan book
CMP 630
with low risk, hungry management that sets challenging targets for self and
growth without dilution. We believe Can Fin can sustain high P/BV multiple
TARGET PRICE 2000
and reward patient investors as it chases target of loans of ₹ 350bn by FY20
from ₹135bn at end FY16. We initiate coverage on CFHL with BUY with a
target price of Rs.2640, implying an upside of 29% from the CMP of Rs. 1320. MARKET CAP 4929 Cr

Investment Rationale No. Of Shares 2.6 Cr

 CFHL is the fastest growing HFC among listed companies with an 52 WEEK HIGH 675
expected loan growth of 28% CAGR over FY16-18E.
 Can Fin has the best in class asset quality with GNPAs at 0.25% in 52 WEEK LOW 502
Q2FY17.
 Non-housing book (LAP & others) is expected to grow at a faster
rate of 42% in FY17. It was 12% of loan book at end FY16 and will likely reach 16% in FY18.
 Low cost funding from NCD/CP/Public Deposits increased to 48% in Q2FY17 from 34% in FY16.
 These strategic changes in the composition of loan book and borrowings are expected to translate into expansion of
spreads from 2.33% in FY16 to 2.75% in FY18E.
 We expect Can Fin to deliver PAT CAGR of 35% over FY16-18E. At CMP of 1320 the stock is trading at 4.3x and 3.5x its
estimated adjusted book value for FY17 and FY18 which is attractively valued considering the valuations of its peers.

SIGNAL2NOISE CAPITAL PARTNERS Page 2

 3 CANFIN HOMES RESEARCH REPORT

Company Background

Can Fin Homes Ltd (CHFL) is one of the large players in The housing finance sector in India today. CHFL has completed 29 years of
operation in the field of home finance and has made profits and paid dividends continuously since inception in 1987. CHFL has 120
branches and 50 satellite offices spread across various locations in India and all these branches and satellite offices are linked to the
Registered Office at Bangalore through a core banking platform. Since its parent bank has strong roots in Southern India, 70% of
CanFin branches are located in Southern India and the remaining 30% in Northern India. CHFL is a housing finance institution
approved by National Housing Bank (NHB), the apex authority of housing in India. CHFL is offering a range of loan products, housing
loans as well as non-housing loans, at competitive interest rates and designed to suit the needs of the customer. CHFL is one of the
few housing finance institutions permitted by National Housing Bank, to accept deposits from public. The deposit schemes of CHFL
are rated "MAAA" by ICRA, which indicates highest credit quality and carries the lowest credit risk.

Key Investment Highlights

 Vision of Loan CAGR FY16-20 - 35%
 Vision 2020 – Management Goals
 To reach the loan book size of ₹ 350 bn end of FY20 with high Asset quality with transparent and best ethical practices and
prudenrisk management practices.

 Business Budgets for FY17

 Loan book size of ₹135 bn (from ₹106 bn in FY16)
 Number of Branches/Satellite Offices to be up at 175 (from 140 as at Mar2016)
 To improve its asset quality
 Lend to individual segments
 Increasing the Non Housing Loan segment
 Improve profitability

SIGNAL2NOISE CAPITAL PARTNERS Page 3

4 CANFIN HOMES RESEARCH REPORT

 Extend its business operations

 Increasing the Geographical Reach

 Branch Expansion continues in FY17

CHFL had mainly been concentrated in Southern part, 76% of the branches are present in South. But now to reach their
goal they are steadily spreading in other parts of the country as well.30 new offices were added during the Q1FY17 taking
the network to 170.With this branch network, CHFL will enjoy a strong marketing and distribution capabilities to scale its
business and address the growing needs of a larger section of customers. It helps to enhance the service quality and also
the visibility in the market They are not only adding the touch points but also focussing on improving the performance and
efficiency of each branch by taking various cost reduction programs.

 Continuing work with Direct Selling Agents

In order to strengthen the marketing and sales operations of CHFL at grass root levels and to penetrate deeper into the
market, the services of Direct Selling Agents (DSA) are being taken by CHFL. However, the DSAs provide leads to CHFL,
while the technical tasks such as credit and legal aspects are monitored by the higher officials. The number of active DSAs
working for CFHL amounts to 638. About 53% of the total business sanctions are been sourced by them in FY 15-16 as
compared to 57% during previous FY 14-15.
 Continues to invest in Technology
CHFL has invested in technology to make things easier for customers. In 2013, Can Fin linked all branches on a centralised
platform (like a core banking platform) under Application Service Provider (ASP) model. To make processes simple for
customers it has provided services like:
 ECS
 Online transfer of funds
 Online application
 SMS alerts
 Customer feedback through web portal
 In the foreseeable future, CanFin plans to further invests in technology to minimise distance with customers.

 Asset Quality best amongst the peers, higher provisioning drives comfort
CHFL have a robust credit policy and recovery policy. Their systems of strong credit appraisal, credit monitoring, SMA/NPA
follow up ensures good asset quality and regular returns. They have registered good results continuously - they reduced
their chances of defaulting credit and maintained the lowest NPA in the Indian housing finance industry. Their prudent
lending, vigilant credit mechanism and effective collection system have helped them maintain Non-Performing Assets
(NPA) for the FY16 at 0.19% - which is well below the industry average of 0.70%.

In Q2FY17:-
 Gross NPA continues to remain low at 0.25% (0.29% at Sept’15)
 Net NPA contained at 0.03% (0.10% at Sept’15)
 Provision Coverage of 88% (67% at Sept’15)

SIGNAL2NOISE CAPITAL PARTNERS Page 4

 5 CANFIN HOMES RESEARCH REPORT

Perfection of security has also been given high importance in order to ensure better quality of assets. One-time settlements and
intensive recovery drives are used to bring down core NPAs. CHFL has been able to maintain the lowest GNPA level in the industry
mainly because of CHFL’s intense effort and focus on asset quality.

 Globalization - Recruiting Smart Local talent

It is easier for local people to understand, communicate and connect with the customers of the same region in better ways. As a
result, CHFL has strategy to hire local talent to serve local clientele. It also adds credibility and helps to build customer trust and
turns the customer’s aspirations into reality.

 Lowest Turn Around Time amongst the peers

CHFL has a turnaround time (TAT) of approximately 7 days for loan approval as they have highly efficient operations like:
 Quick credit appraisals
 Credit monitoring
 NPA/SMA follow up
 Centralised transactions
 Generation of quality MIS Target customer segment continues to be Salaried Professionals who aspire to have their own

SIGNAL2NOISE CAPITAL PARTNERS Page 5

 6 CANFIN HOMES RESEARCH REPORT

 Lending Basket

 Carving their path in the right direction:

Central Government is taking initiatives like
 Real Estate Regulatory Act
 Atal Mission for Rejuvenation and Urban Transformation (AMRUT) - to boost the infrastructural growth of the nation by
developing 500 cities across the country
 The Smart City Project – to develop infrastructure in 100 cities
Implementation of such policies would increase the demand for home loans and CHFL already has a strong presence in states like
Andhra Pradesh, Tamil Nadu and Karnataka and other cities which come under these projects like Kakinada, Tirupati, Mangalore,
Hubli, Raipur, Chandigarh, Ahemdabad, and Vadodra etc. Focussing on such developing cities will help them to achieve their loan
growth target. In India, about 90% of the total demand for housing is constituted by demand for affordable homes. The average
Ticket Size for FY16 for Housing Loans is 1.8mn and for Non – Housing Loans is 0.9mn catering to the Tier II and Tier III cities.

Multiple Levers to widen the margins

Non-Housing Loans in high growth Phase:

SIGNAL2NOISE CAPITAL PARTNERS Page 6

 7 CANFIN HOMES RESEARCH REPORT

Management has given guidance of Loan Book to grow from 106 bn to 135bn in FY17. We expect the proportion of non- housing
loans to increase to 16% by FY18. Table below shows that the Non-Housing Loan interest rates are much higher than the Housing
Loans; this will lift up the NIMs and profitability of CHFL.

 FUNDING BASKET: Increased Focus on NCDs & CPS – Key boost to margins

With strong AAA ratings for borrowings/NCD and A1+ for CP programs, CFHL has reduced the borrowing cost and improved the
margins and profitability by increasing the proportion of the Borrowings through money market instruments like NCDs and CP. CFHL
has reduced dependence on Bank Loans from 54% in FY09 to 27% in FY16 which has substantially reduced the cost of borrowings. It
was 8.75% by the end of FY16 down from 8.89% as on Dec 2015 and further intends to scale down the borrowing cost and
strengthen the margin levels gradually. This will be backed by the combination of strict cost management and cost reduction
programmes started in FY16 which resulted in high profits and margin levels.

SIGNAL2NOISE CAPITAL PARTNERS Page 7

 8 CANFIN HOMES RESEARCH REPORT

The borrowing cost going down and yield rising up due to increasing proportion of Non Housing Loans we expect NIMs to reach at
the level of 3.6% by FY18.

SIGNAL2NOISE CAPITAL PARTNERS Page 8

9 CANFIN HOMES RESEARCH REPORT

SIGNAL2NOISE CAPITAL PARTNERS Page 9

 10 CANFIN HOMES RESEARCH REPORT

Financial Outlook
 Business momentum to remain healthy
In Q2FY17, 30new offices (10 branches and 20 Satellite offices) were added taking the network to 170. Increase in touch points will
help CFHL to achieve their targets. In Q2FY17, the NCDs and CPs proportion increased from 37% (FY16) to 48% this Quarter. With the
borrowing cost reducing and the high margin business i.e. Non-Housing Loans’ having a robust growth we expect CFHL’s profit to
grow at a CAGR (FY16-18E)-32%. With all the network expansion and hitting the right target segment with the support of
Government initiatives, we expect CFHL to outperform and achieve their set goal.

The Interest income grew 26% YoY and NII grew 42% YoY. Provisioning decreased from Rs.75mn to Rs.60mn and profit grew by 56%
YoY basis. This is the result of the changing borrowing mix as the proportion of NCDs/CPs increased as compared to last year. This is
also reflected in the NIMs expansion. We expect this trend of expansion to continue.

Valuation
We expect CFHL to deliver PAT CAGR of 35% over FY16-18E. At CMP of 1320 the stock is trading at 4.3x and 3.5x its estimated book
value for FY17 and FY18 which is attractively valued considering the valuations of its peers.

SIGNAL2NOISE CAPITAL PARTNERS Page 10

 11 CANFIN HOMES RESEARCH REPORT

We note that CFHL valuation has increased from 0.6x book value in April 14 to 4.2x book value by September 16. This was driven by
consistent improvement in ROE. By end of FY16, Can Fin has 18% ROE and we expect further improvement to 21.8% by end of FY18.
We think this would support the existing valuation.

We arrive our price target of 2640 by applying 4x multiple to expected adjusted book value of 544 at end of Sept 18.

We note that CHFL traded between 10-15x forward PE till March 16. It has seen a sharp re-rating in the past few months and trades
near 20x now. This re-rating could be due to strong performance in 1H FY17 and announcement of intention of increasing loan book
to 350 bn by FY20.

SIGNAL2NOISE CAPITAL PARTNERS Page 11

12 CANFIN HOMES RESEARCH REPORT

Financial Statements

SIGNAL2NOISE CAPITAL PARTNERS Page 12

13 CANFIN HOMES RESEARCH REPORT

SIGNAL2NOISE CAPITAL PARTNERS Page 13