Canfin homes ltd

Stock Opportunities Not-so-Hidden Gems
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Hi Punit,I fully agree on your Price to Book value part.To command greater P/BV can fin has a long way to go provided their return ratios keep getting better.Banks and financial companies are good compounding machines if they have great focus on asset quality and margins.Currently,Can fin has a loan book of Rs.8000 crores and if we divide by its average ticket size of Rs.17 lakhs,we get 47000 accounts.In India,we have crores of housing shortage on the low ticket housing segment.Looking at the housing sector opportunity,I would stay put and monitor its performance quarter on quarter.I keep adding into my position on every dip with a 2-3 years view.

Hi Pranav,May be it will trade in 20 PE range,I will gladly accept it.However,if it trades on 20 PE,it’s Price to Book value will be close to 3 which is very unlikely given its performance metrics.

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Hi Sambath,

I understand P/E ratio, but could never understand how to benchmark valuation using P/BV ratio even for financial firms. I would appreciate if you could give some pointers or direct me to some web resource.

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Hi Pranav,Let me try to explain with my limited knowledge.Banks and financial institutions have no inventory,no raw materials,no creditor/debtors as you know.Only real component in these companies is equity which is Total Assets - Liabilities.They just leverage their balance sheet based on the equity and borrow cheap and lend at high rates.so,Cash is the only raw material and how well they handle the cash becomes the key in running them successfully.As a result of this,one of the important metric used for valuation for these companies is price to book (Current Market Price/Book Value) where book value = total assets - current liabilities or Book value =(Shareholder funds + retained earnings).So,when we try to value banks and NBFCs price to book is the most commonly used ratio.This ratio is influenced by its RoE,RoA.Companies like Gruh and Repco have high RoE,RoA and low NPA which is why market pays high price to book value just like HDFC.Whereas PSU banks will always trade below their book value because of their poor RoE,RoA and NPA.

Moreover,Price to Book is also used as a relative valuation when comparing similar companies just like PE ratio to get a sense of how it is valued by the market compared to its peers.Here in the case of Can Fin,expected EPS for next year is 63 if we assign a PE of 20 * 63 will give a price of Rs.1200.Now let us do a price to book check:Expected book value for Can Fin is 400, which means to achieve 1200,price to book value should be 3 (3*400 =1200).
Historically,except LIC Housing finance which traded at price to book of around 4 in 2010-11,PSU companies never commanded more than 2 times its book value.And Can fin's current RoA of 1.52% and RoE of 16% are not enough to achieve higher P/BV than its current 2.2 in my educational guesswork.So,the bottomline is when we assign PE to fianancial companies,we have to cross check its book value as well to get a better sense of its comprehensive valuation.

Hope this helps.
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@Sampath,

While PSU companies may never have commanded historic valuations, that itself is not a valid reason. It’s like treating Buffett’s famous line of ‘Airlines being destructors of wealth’ and refusing to invest in any airline company at all. But the funny thing is, Southwest Airlines generated more wealth for Shareholders than Berkshire Hathaway. We need to treat each stock on its own merit.

While Canfin homes may never premium valuations unlike its peers like Repco, Gruh, HDFC due to their supreme return ratios, there is great scope for the company to improve its returns. The rights issue and plan to use NCDs is a step in that direction. As stated earlier, plan to increase LCP weightage in the overall loan book is to increase NIM and returns. Regarding the downside, Canfin NPAs are the best in the industry. So we have sufficient protection there as well. In the hands of Ilango, Canfin’s future is bright.

Canfin may or may not command 3xPB but we cannot categorically say that.

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Hi Aravind,

I am not disputing anything here about the valuations.In fact,i will be the happiest person as a shareholder if the price to book increases to 3 or more than that.Even in the case of LIC housing finance i decided to buy it around Rs.170 in 2009 but never got the conviction and it went on to touch Rs.1500 in a year.So,as a PSU company it was a wealth creator too.All I am saying is Can Fin can also scale greater heights if the return ratios move up.With RoA of 1.5%,I am not sure,the price to book value would go even further.End of the day market is the supreme force and anything can happen.

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Hi Sambath,

Thanks for the detailed reply. I really appreciate your effort!

I look at it a little differently. Let me explain:

RoE = Earning / BV of Equity

PE = Price / Earning

PB = Price / BV of Equity

So, PB = PE * RoE

Even at the same RoE, Price to Book can rise to a much higher value if PE ratio goes up. I find much easier to interpret PE ratio, because it tells how much is the market paying for 1 rupee of current earnings. PB does not yield itself to such an interpretation (If I look at PE = PB/RoE, PB does not tell me a lot about how much will market pay for 1 rupee of earnings). PE ratio depends on the growth in future earnings and their discount rate/risk.

So, I use PE as the cause and PB as the effect andinterpret all this as: if Market revises its assumptions of future earnings upward or lowers the associated risk then P/B will go up at the same RoE. So, the question that I ask myself is whether the company (CANFIN) is doing something to improve its earnings and/or reduce the risks and try to judge the combined effect of these two factors.

These views are personal and may be deeply flawed. Once again any contribution from you and other fellow boarders will be highly appreciated.

~Pranav

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UC in canfin Homes… Any news that we are not aware of?

Last post on the first page of this thread talks about UC and whenever I come to this thread, I see it. Somehow I always associated Canfin with UC because of the that post but if my memory serves right, it is happening for the first time in past 1+ years that I am holding it.

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@gyan Roy Wild ( obviously, unconfirmed) rumor - kotak is picking up a stake

Ps - not a reco. Do your homework.

Disc - invested. Views might be biased

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The stock of Can Fin has had a massive rise,of late.The multiples have expanded from 1.8x BV to almost 2.6x BV in a fortnight itself! Just a few weeks back,there was a nice discussion whether Can Fin ‘deserves’ to trade above 2x Book value.But as it happens,markets have surprised us again.

Either this is a purely speculative move,fuelled by some ‘buzz’ of takeover or this is a re-rating of the core business.As discussed earlier,CFH is mostly a regional player with no strong niche(unlike Gruh/Repco) Moreover,on current RoAs/RoEs/NIMs…anywhere near 3x BV seems quiet a fair valuation.So:

->Are markets trying to discount future earnings,since CFH will be growing its loan book at 35-40%,without needing further capital and with almost nil NPAs? Are markets paying for higher growth vs. peers here?

->From another angle,one may ask whether inspite of all the virtues of Gruh…does it still deserve to be at 16x BV? If yes,then is a 80%+ discount to the ‘sector leader’ justified?

->Is the whole HFC pack getting re-rated again?(for which,the peers will also have to make a move soon)

I am just trying to get a better handle of things here.

Views invited.

Disc.:Invested in CFH

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What is thrilling to notice is the jump in price, accompanied by jump in volume. Even today, the volume was incredible. Hopefully, it is not a flash in the pan but I guess with solid projections available about the growth in loan book (thro’ Ilango’s interviews) in comparison with say (Gruh’s MD giving a story on the opposite plane), my sense is that there is some re-rating. That said, let us see how the sector leader (GRUH) fares tomorrow in Q4 result and we can take things from there. Usually, Q4 is their strongest qtr and I am hoping that it will propel the unusually quite GRUH to back to 300s.

PS - This is not a reco. Pl do your due diligence

Disc - invested, may be biased

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I guess when the business is strong/stable, the management is ethical, and the base is small, the investor has a feeling that the compounding with happen faster. It’s not just true for Can fin (~ Mcap=1500 cr), but also for other sectors (cos. like granules, Mcap=2000 cr. or shilpa med., Mcap= 3700cr etc).

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Management Q&A performed by StockExplain

**http://www.stockexplain.com/2015/04/can-fin-homes-md-ceo-interview.html
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Am posting the most relevant excerpts -

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Can Fin Homesa fortunes have taken a dramatic turnaround since you assumed office. However, this dependency on a high-performance leader is sometimes cited by analysts as a key risk with Can Fin Homesa future performance. How do you view this, and has Can Fin Homes reached a stage of growth, where future leaders are already being groomed for this role either in Can Fin itself or in the parent bank?

Can Fin Homesa Board of Directors consists of highly experienced professionals and their collective wisdom takes care of such anticipated fear or risk, if any.

With regard to the successful Rights Issue, in what timeframe do you plan to utilize the funds? What is the loan book growth rate that you expect, and when will you be in need of similar funds again?

Taking into account that the economy will behave in a stable and predictable manner, it is not difficult to grow at a rate of 30%. That means we may need fund infusion during September-to-December of 2017, depending on the growth of the business.

Despite the presence of a high-profile fund like Infosys co-founder NR Narayana Murthyas Catamaran, the stock of Can Fin Homes is still under-owned by FIIs and DIIs. Are you planning any specific steps for more institutional participation?

As on today, there is no such plan. However, we continue to meet investors as well as analysts, both domestic and international, to exchange viewpoints.

As competition in the housing finance sector intensifies, what all will you consider as the unique selling points of Can Fin Homes, as applicable to prospective customers? And from a shareholder perspective, what all will you consider as Can Finas USPs?

There are many USPs from a customer viewpoint, of which I will mention around three factors. Firstly, Can Fin Homes follows ethical, transparent, and time-tested practices that results in good and efficient service. Secondly, we have industry-leading Turnaround Time (TAT), with sanctions happening within 7 days. Thirdly, being sponsored by Canara Bank, we combine the safety of public sector and the efficiency of private sector.

And from a shareholder perspective, what all will you consider as Can Finas USPs?

Can Fin Homes can deliver a topline growth at the rate of 30-35% with matching bottomline expansion. We have a committed field-level task force led by branch heads to take care of this future business growth. Our superior TAT helps us to to keep up the momentum and business expansion. Can Fin Homes has robust credit underwriting resulting in highest asset quality, with GNPA below 0.25% and net NPA being nil. And we have a highly experienced professional board that ensures established systems, procedures, and policies.

All smaller HFCs have huge room to grow in this country. What all will constitute your growth strategies for Can Fin Homes to carve out a larger market share? As part of your leadership, do you instill in your team that hunger for growth that is more often seen in the private sector?

As I mentioned before, being a private sector company sponsored by a large PSU bank, we combine the safety of public sector and efficiency of private sector. We are charting our future growth through expanding our pan India presence by way of branch expansion as well as by matching the market demand by introducing tailor-made products to suit the demand. Our employees are continuously trained through meetings, conferences, and specific training programs to enhance their capabilities and performance. Can Fin Homes also recruits new generation workforce by offering them attractive remuneration packages and high scope for career growth.

Disc: Invested.

Please do ur own due diligence.

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May 4th is supposed to be the result date as per bse site and there was a board meeting announcement too, for considering the Q4 results but I have not seen any update. Has anyone seen? I hope that the figures will live upto the Ilango speak, even with the higher provisions imposed by NHB

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my bad…got today’s date wrong. apologies

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HI Kalyan, You can subscribe to bsealerts.in to stay updated automatically.

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Canfin Result

Could anyone through light on other expense which got increased from 6 to 13 Cr Q-Q?

http://www.bseindia.com/xml-data/corpfiling/AttachLive/974D0E2A_BA20_47F4_AC47_F4094277BD63_184126.pdf

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Please see note no 6, provisions of Rs 12 crores this quarter which is part of other expense, havnt had a detailed look but I am extremely pleased by the increase in topline (in a subdued business environment) and considering the Rs 12 crore provision and increased tax expenses, profits are , I would say bumper!

When I have time, will look in detail and update

Regards-Mahesh

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Can anyone also throw some light on the tax expenses, major drag on the net income? Effective tax rate for the qtr was 42%, last qtr was 35%, last year it was 27%. There are some notes around deferred tax liabilities, but I did not quite understand these.

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This year result has involved one new accounting entry which impacts the net profit and the networth of all HFCs.

As per the NHB mandate last year,HFCs have to create a deferred tax liability(DTL) in respect of the balance in the special reserve.Can Fin has to adjust Rs.73.99 crores over the next 3 years in the ratio of 25:25:50.So,this year it has adjusted Rs.18.5 crores to the DTL from the general reserve and additional Rs.7.97 crores charged from profit and loss account.From next year another Rs.18.5 crores and the following year Rs.37 crores will be charged off of Profit and Loss account.

This affects the net profit for the next year by Rs.18.5 crores and the year after by Rs.37 crores.Again,this is an accounting entry and affects all the players,however it affects the EPS and Net worth of the company.

Good news is it does not have any cash flow implication and this will be considered as part of Tier 1 capital.

Question i still have it how did we arrive at the number of Rs.73.99 crores.Read somewhere this DTL is 6% to 10% of the net worth.Seniors please confirm.

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FY16 guidance of 30% NII growth-