Canfin homes ltd

Stock Opportunities Not-so-Hidden Gems
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Posting a recent article in ET on Can fin - Seems lots of value unlocking still tohappen

Focus on faster delivery helps CanFin Homes take on rivals

The turnaround story of CanFin Homes, an associate of _Canara Bank_, began way back in FY11, when the company got a new management. The company which was earlier stagnant in terms of branch and loan growth saw several changes. The market was growing, but competition was growing faster. The new management, headed by C Ilango, realised that something had to be done. And fast.

Soon it changed the way the housing finance company was doing business. “We centralised the system, brought new staff and started sales through agents as compared to earlier, and at the same time, increased branches rapidly. This gave a new life to the company,” Atanu Bagchi, chief financial officer, _CanFin Homes_ told ET. The result of the change of the strategy was gradual, but then it picked up sharply. Since then, the branch network has increased from 41 in the end of FY11, and more than doubled in the past three years to 103 at present.

Its loan book grew 21 per cent in FY12, and then 50 per cent in the FY13, and 46 per cent in FY14 to Rs 5,844 crore. “Our June 2014 quarter was much better than the March 2014 quarter, when usually the June quarter is a low sales season for the industry. From this, you can infer the strength of our business,” Bagchi said.

“Although our interest rates are higher, we continue to see strong demand. Customers today are willing to pay slightly higher interest rates, but what matters to them is the turnaround time. If they are getting loans quickly, they don’t mind. Our endeavour is to give best services to the customer,” he added. While being aggressive in terms of loan book growth, the company did not compromise on the asset quality. Its NPA (non-performing asset) of the total loan assets in FY14 was only 0.21 per cent compared with 1.06 per cent.

Compare this with the industry which has an average of 0.7 per cent. The company is now looking to reduce bank loans by borrowing through issuing NCDs (non-convertible debentures) and CPs (commercial papers) which, at present are only 4 per cent of the total borrowing of .`5,200 crore. The attempt is to improve the _net interest margin_ (NIM).

“We have the mandate from our board to raise Rs 2,500 crore through NCDs,” says Bagchi. According to industry experts, the company’s NIMS may increase to 3 per cent from 2.71 per cent currently. At the same time, the company has plans to raise rs 300 crore through rights issue which will propel additional growth in future. All this could lead to company’s earnings to grow by close to 40 per cent for the next couple of years.

Narayana Murthy, the co-founder of Infosys, was early to spot the changes in Can Fin Homes, and was prompted to pick up a stake in the company through his fund, Catamaran. _Catamaran_ bought 1.49 per cent in March 2013, and increased it to 2.98 per cent at the end of June this year. Other institutions followed.

Although the company’s stock has gained 170 per cent in the year to date, it continues to remain attractive when its financials and valuations are compared with its peers. While its NPAs and the growth are the best in the industry, the valuation remains the cheapest. However, in the coming few quarters, the stock may get re-rated as the Street realises the potential of the company.

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tohappen

Hi Santosh,

Thanks for the article.

Cheers,

HR!!

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Informative:

http://www.moneycontrol.com/mccode/news/article/article_pdf.php?autono=1205688&num=0

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There have been positive developments in this company. If you read DRHP of rights issue, you will see that out of about 710 crores of loans that was disbursed in Q1 2015, about 500 crores was given to non-salaried class. This new-found focus should increase their profit margins going forward, although one has to monitor how they manage the risks in this business segment. Non housing loans yield about 2.5% higher interest and it seems that CanFin counts LAP as non Housing loans too.

Also, Care and ICRA have upgraded the ratings from AA+ to AAA. If they utilize substantial part of 2500 cr rating limit for raising NCDs, then it should decrease their funding cost further. I don’t know NCD rates riht now, but it should be about 0.25 to 0.5% lower than their present marginal cost of funds of 10%.

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Do we know when the Q2FY15 results are out ?

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Hi Harsha,

CanFin’s results will be out on 12th Nov 2014.

Thanks,

Vikas

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Q2 results out

V similar to Q1, Sales up 40 %, PAT Flat due to v high Finance cost, no date for rights issue as yet.

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It is important to note that by H1 the BV has increased to 240 from 220 from Fy 15. So it is on its way to 270 by fy15 end and 330 fy 16 . So depending on what multiple one assigns for fair value 2.5 or 3 x, fair value could be 685( 810) and 825 (990) respectively.

Loan growth continues to be 40 %, which highest in the industry, although at a lower base, NPA almost NIL.

Disc: Invested, views biased

Comments/Views are welcome as always !

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The only problem is that it being a PSU , shouldn’t end up compromising on profitability by focusing too much on branch expansion.

Discl : Invested

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Aptus Housing Finance just raised 100 crores from Westbridge…Interestingly the valuation is close to 4x FY14 Book value…much higher than Can Fin Homes, LIC Housing, GIC Housing…

Can Fin has uploaded the latest investor presentation post Q2 results (http://www.canfinhomes.com/Can%20Fin%20Homes%2031-10-14.pdf). Q3 & Q4 should be good due to aggressive branch openings in Q1 & Q2 beginning to show results (currently 109 branches compared to 83 in March end). The deferred tax liability has been a bit of a dampener on EPS/ Net profit growth.

QIP or Rights issue is expected to happen in the next couple of months to ensure the CAR is within regulatory levels of 12%.

Will be interesting to see the pricing of the fundraise which should help provide a floor to the price of the business…

Shareholding pattern offers good hope for a re-rating -

FII holding = 0.65%

DII holding = 0.44%

Lets see how the story unfolds further.

WestBridge Capital Partners bets Rs 98 crore on Aptus Value Housing Finance

“In the last five years, we’ve grown our loan book to Rs 320 crore, and have processed Rs 5,400 loans. This investment will enable us to expand distribution and the overall portfolio,” Aptus founder M Anandan told ET.

The Chennai-based startup, founded in 2010, had earlier raised capital over multiple rounds from Granite Hill Capital Partners and India Financial Inclusion Fund. While the amounts invested have not been disclosed, both investors own 15% stake each in the company.

The company provides loans to borrowers from the informal sector and is targeting a portfolio of over Rs 2,000 crore in four years. The ticket size of loans disbursed by the company is usually in the Rs 3-15 lakh range. It claims a 99.7% recovery rate and is currently active in Tamil Nadu, Andhra Pradesh and Karnataka. For WestBridge, the Aptus deal follows earlier private market investments in Dr Lal Pathlabs and Vistaar Financial Services. "We do have a stated public equities investment strategy, but we remain open to select private investments.

We think Aptus operates in a space that will be a very large market in 10-15 years," WestBridge MD KP Balaraj said. The firm is currently investing from the $825-million WestBridge Crossover Fund, which has invested $450 million in 20-odd companies over the last three years. The firm manages $1.2 billion in funds, including two legacy funds that were raised prior to the WestBridge Crossover Fund

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If approved, see rights issue in Jan/Feb: Can Fin Homes

Noteworthy from Mr.C Ilango:

  • Our loan book size is growing at 44 percent and our bottomline is growing around 20-25 percent via net interest income (NII).
  • We will maintain the gross NPA .25 but incidentally we would like to add, we are striving hard to reduce it still further and our asset quality and we have strengthened our follow-up mechanism, in fact our branch managers, everybody has given an extra sensitisation on this subject because Can Fin Homes means asset quality is the number one strength which we will maintain in future also because we are ahead of other in the industry. We will maintain the number one position in the future also. I do not see any pressure.

Kunal

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I’ll be meeting management of REPCO and CanFin Homes soon, so please let me know if you have any specific questions that you wanted answers on.

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Hi Punit,

Did you meet with Can Fin management? Can you share a brief of your discussions?

~Merry Xmas!

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Expected BV was fy 15 270, fy 16 320

After raising 300 cr through rights issue, Can any one estimate what will be the BV if rights get concluded by feb 2015.

For a company having 950 cr m cap raising 300 cr will have a huge impact on both BV & NIM and CAR. Its 30 % of m cap.

So after this can be valued in the league of Repco Home, with high P/BV say 3-4 times as NIMs will also increase. or it will be valued in the range of 2-2.5 tomes BV.

So, this rights issue is comparable to Repco Home IPO ?

If one assuming BV Fy15 rises to 320, Fy 16 BVwill be 400, So this looks terribly cheap, once the rights issue is out of way ?

Am I missing sth ?

Views are welcome !

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Right now, after H1 FY15 , BV is 239/- and networth is 452Cr + 38Cr = 490 Cr.

After Rights Issue and Q3 results, another 320 Cr. should be added into the networth

Right now, Mcap is 1000 Cr. , so say the ratio of rights issue is 3:10.

If number of shares currently = n

No. of shares after rights issue = 1.3 n

New Book value after rights issue n after Q3 results= 304/- if my calculation is not wrong.

The same thing happened with Yes Bank. Book value jumped from 170/- to 250/- after QIP. Their Q2 PAT improved as expected n they say they will get to usual 23-25% RoE in a few months. So the share price rocketed. The same can easily happen with can fin. Only difference is that it is a PSU.

BVwill

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Thanks VickyB,

I do agree with your analysis. So, FY 15 BV will be close to 304, then fy16 may end up at 375, so 3x BV will be close to 1000, the stock price, same happened with Indusind and yes bank, which is pretty normal with banks/fin companies, as they raise fund at higher than present BV price. There will adjustment in price post rights issue, is a normal thing anyways in the same ratio 3:1.

Since loan growth is 40 %+, NPA close to zero, RBI rate cut, I think stock can do really well, once the rights issue os out of way asap.

Cheers and HNY to all !

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Santosh, VickyB

Good line of thought … yet the picture looks too rosy.

  1. Have the increased outstanding shares been accounted in BV calc? To me, seems not / calc is opaque to understand nuances.

  2. Market price = 3X BV assumption. If so, why is it not ruling at 700+ currently (with an imminent rights carrot)?

  3. Rights issue comes at an additional cost for the investors. So projections (or probable gains from CMP) should also account this

  4. Rights ratio will determine outstanding shares and has an impact on BV. 300 crores raised wont get distributed in the same fashion as current net worth and hence these assumptions have limitations.

  5. Comparing Banks and HFCs are not apples to apples comparison and factoring same multiples is wishlist.

Appreciate your initiative and efforts in sharing thoughts on new directions and but since the picture is too rosy with limited available information, would like to sound a note of caution.

Disclosure: Holding & have vested interests.

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Increase in no. of shares was accounted for in my calculation.

BV = Networth divided by No. of shares.

Since current Mcap is 1000Cr, ratio of rights issue could be 3:10(assuming there is not too much discount in price for allotting new shares).

Which means if no. of shares are ‘n’ right now, No. of shares would have become 1.3n after the rights issue.

As the BV is 239/- right now, so 239=490/n

After Rights issue and after Q3 results(say Q3 PAT is 20Cr), new networth is 490+320=810Cr.

New BV = 810/1.3n

new BV = 304/-

Since they are a PSU, they will typically operate at lower RoE than say 25% I guess. What P/BV the market assigns to it, its totally upto the market. But I think it should be 2+ .

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Hello Santosh,

If someone buys today will he be eligible for the rights issue? Or, is it a better idea for the rights issue to passby inorder to make a purchase?

Regards,

Roberto

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Hello Sandriano

Yes if one buys it nowhe/she will be eligible for rights issue.

Board is meeting on 12th Jan for rights ratio and also record date for rights issue.

Best

Santosh