Hi Ayush,
I concur with Kiran’s views on CAR and Canara Bank rub-off effect though the latter may only lead to a temporary weakness in case some really bad NPAs get reported by Canara Bank.
CAR for most competitors including LICHF and GIC are at same level or worse than Canfin. Both LICHF and GIC are trading at much higher valuations. Canfin is better than them in terms of Gross NPA and NIM. So as mentioned earlier this looks like a clear undervaluation bet for the medium term.
Cheers
Vinod
The good news Is on the continuity front. The man responsible for the turnaround Mr Illnago is not moving any where for next 1 year atleast. Any way the chairman Mr Iyer ex dy MD SBI is there for next 5 years. Mr Dubey the new chairman of Canara Bank is a very aggressive professional n shud gel well with Canfin team.
The company guys are quite confident about the growth prospects.NPA s hv reached historic low level. Katalyst wealth has also initiated coverage on the stock.
HDFC SECURITY NOTE
In our Stock Note dated January 01, 2013 we had recommended investors to buy Can Fin Homes Ltd. (CFHL) at the then CMP of Rs. 160.2 and to add on dips in the price band of
Rs. 134-141 for a price target of Rs. 177 over the next quarter. Thereafter, the stock nearly met our price target on Jan 18, 2013, touching a high of Rs. 187.9. Currently, it is quoting
at Rs. 151.5.
CFHLâs Q4FY13 results were better than our expectations. We present an update on the stock.
Q4FY13 Results Review (Consolidated)
Y-o-Y
â CFHL reported strong growth of 38.7% Y-o-Y in its net interest income [which stood at Rs. 315 mn] on the back of higher interest income (strong growth in advances). However,
higher employee cost (up 162.9% Y-o-Y) led to lower growth in the pre-provisioning profits, which stood at Rs. 308 mn, up 20.2% Y-o-Y. Branch additions, hike in the
remuneration and new recruitments have resulted in sharp surge in employee costs on a Y-o-Y basis.
â Provisioning declined by 6.5% Y-o-Y. This resulted in better PBT growth of 30.9%.
â PAT grew at a slower rate by 16.2% at Rs. 146.4 mn due to higher effective tax rate (up 1347 bps Y-o-Y to 35.1%). EPS for the quarter stood at Rs. 7.1 vs Rs. 6.2 in Q4FY13.
â NIMs as on March 31, 2013 stood at ~3.3% (calculated).
Q-o-Q
â Sequently, NII rose 8.7% Q-o-Q, while pre-provisioning profit grew by 42.4% Q-o-Q, driven by sharp decline in the total expenses (down 70% Q-o-Q). Provisions were up sharply
by 77.9% Y-o-Y (possibly due to strong sequential growth in the loan book), which restricted the PBT growth to 34.7% Q-o-Q. Higher effective tax rate (up 619 bps Y-o-Y from
28.9%) resulted in 15.8% Q-o-Q growth in PAT.
Conclusion & Recommendation:
The company has witnessed a turnaround in disbursements & loan book growth over the last 1.5 years, which has been aided by branch expansion & increasing demand. The
sanctions and disbursements grew by 89% & 111% in FY13. The companyâs increasing focus on growth and recent aggressive expansion of its branch network from 41 in FY11 to
69 in FY13 and a target to reach further higher in FY14 has put it on a high growth path for the next few years. The expected moderation in the interest rates is likely to increase
demand for fresh loans and enable CFHL to maintain its growth momentum in the loan disbursements (likely to grow by 40-45% in FY14). Increasing demand, rapid branch
expansion and strong growth in disbursements would enable CFHL to maintain growth momentum in its loan book. The loan book has grown by around 50% in FY13 and we expect
it to grow at a robust rate in FY14 compared to 8.9% growth achieved over FY08-12.
CFHLâs funding profile continues to remain strong. The companyâs asset quality continues to remain healthy with Gross NPAs below 1% and Net NPAs being NIL. Going ahead, due
to strong focus on retail segment, strict lending practices and strong recovery efforts, we expect CFHLâs asset quality to remain healthy.
Increasing urban population, lower mortgage penetration levels, increasing affordability, extension of interest subvention scheme leaves scope for Housing Finance industry to
penetrate and grow. CFHL has a very strong presence in South with 16% of its branches in Bangalore and 65% in south India and has plans to expand further over there. The
growth of the Bangalore realty markets is somehow linked to the growth of the IT industry in Bangalore. If the IT industry does well in FY14, the realty market in Bangalore is
expected to boom, which would in turn benefit CFHL in terms of growth in sanctions, disbursements & loan book from the increased volume offtake in south.
At CMP, CFHL trades at 0.7x FY14E P/ABV, which is at a discount to its comparable peers like GIC Housing, Dewan Housing, Gruh Finance & LIC Housing. This could be due to its
smaller size (in terms of loan book) and unimpressive past track record. However, with bright future prospects and change in momentum, we expect an improvement in valuations
going forward. It should be noted that the company has the second highest NIMs after Gruh Finance. Plus its disbursements growth has been among the fastest in FY13 (though on
a low base) and is loan book & disbursements growth in FY13 has been robust. The management has outlined its future growth plans involving aggressive ramp-up of the branch
network and expansion of the loan book. This strengthens our view that the phase of tepid growth period (over FY03-11) is over and now the company is shifting towards high
growth trajectory. Further CFHLâs net NPAs are NIL and the companyâs Capital position is comfortable. Over the next few years, we expect the return ratios of the company to
improve to healthier levels of 17-18% on the back of expected reduction in cost income ratio primarily due to improvement in operating leverage.
hi vinod,hitesh and vivek,
hope you are still invested in this,just cant go on to their website ,there is a link from the canara bank website,which does not have the details .Iam sure the least they can do is have a site which is accesible.has the 2012-13 report come out.It is continuing its state of being undervalued despite the growth.Whats the advice on this with a 2-3 year view.Iam not able to understand what causes the market to rate this badly.If they have to raise capital by the end of 14,how would it affect the eps and book value.
Hi Biju,
You are right the website is not working anymore. Can’t understand why they do such a shoddy job with their website even in this age!
No the AR is not out yet. Their AGM is on Aug 7th.
I am not invested now as I wanted to take a very concentrated position in Kaveri. I’ll need to exit a major chunk of Kaveri in Aug-Sep and then buy Canfin, Navneet and others.
Canfin is definitely undervalued and should give an upmove in next 12 months if the overall market is not that bad. FY14 projections are given earlier.
Cheers
Vinod
Hi Biju,
You are right the website is not working anymore. Can’t understand why they do such a shoddy job with their website even in this age!
No the AR is not out yet. Their AGM is on Aug 7th.
I am not invested now as I wanted to take a very concentrated position in Kaveri. I’ll need to exit a major chunk of Kaveri in Aug-Sep and then buy Canfin, Navneet and others.
Canfin is definitely undervalued and should give an upmove in next 12 months if the overall market is not that bad. FY14 projections are given earlier.
Cheers
Vinod
got the annual report ,no forward looking stuff,CAR was mentioned in two places
1.defending the dividend of 4rs,the mgmt had detailed discussion on CAR and transfer of funds to special reserve as mandated by NHB.
2.For the growth they are expecting in 13-14 they are taking steps to maintain the CAR of 12%,though the details are not mentioned.
branch list is there at the end,though most of the branches are in the south,they have a few branches in NCR,UP,GUJARAT etc.If their niche area is in banglore and south india,i think it would make more sense to increase their presence and visibility there.
I think the reading of the FY13 annual report gives a very positive outlook feeling. The co seems to be on a growth momentum and lots of good/correct things have been done by the current management. I would expect growth rate of atleast 25-30% for the coming year.
However, the biggest concern would be on the margins and continuing of current MD.
Ayush
Mr Ilango the man responsible for turnaround at Canfin will be at helm till March 14. He is gelling well with another aggressive MD Mr RK Dubey at Canara Bank who has extended his tenure being happy with his performance.Moreover another key person responsible for turnaround MR Iyer who is Chairman n ex Dy MD will always be there. The no of office have shot up from 41 which were constant for last 10 years to 69 presently n will go upto 85 by March 14.the margins even if suppressed in short run shud be better in long run.
Catamaran t he investment arm of NR Narayanmurthy has recently taken more than 1% stake in Canfin. Incidentally Catamaran is also Bangalore based n would have taken the plunge after doing due diligence on this fellow city HQed co.
Vinod / Vivek / Hitesh and all experts,
Considering the positive growth in FY14 and the recent correction, can one add at CMP of 135, for a period of 1.5-2 years? Test entry at 146.
Regards and thank you for sharing.
Hi,
I will put in a detailed post after reading the AR2013.
But it looks very good at current price. The management mentioned in the annual report that they plan to increase the branches to 85 this year.
Cheers
Vinod
From AR-
The Good things-
And Not so good-
Overall looks good on Risk-return profile & should have a good FY14.
I have a question for seniors- Vinod, Ayush, Hitesh & others-
Why are they expecting margins to be under pressure?? If cut rate happens, they should be passing it on to customers without hurting their NIMs. If no rate cuts, then no cut in housing interest rates also. So why margin pressure??
My guess is that they expect the cost of additional capital to be higher
Taken position in canfin .
Hi,
Some observations from the AR:
The NIM mentioned for FY13 in HDFC Sec report and my own calculations based on only the results data was 3.2% apprx. But this is not the case! The NIM seem to be about 2.86% only. The interest expense grew by 44% while the interest income grew by 36% only. This sudden drop in NIM has affected EPS growth in FY13 even with stupendous growth in disbursements and loan book.
The spread for FY13 is quite low in the range of 1.6%. Spread is a better measure of the profitability and pricing/fund raising power than NIM.
The income looked good in the annual results due to a 102% growth in fee income from 6.85 Cr to 13.78 Cr. This is a good sign and shows company is able to collect higher fees.
The fee income growth could have been due to huge growth in non-housing segment loan book from 66 Cr to 207 Cr. This is still very low compared to the entire portfolio of 4000 Cr. HDFC has around 25% of the loan book to non-individual segment.
5)** NHB funding has increased from 450 Cr to 1525 Cr and now forms 43% of total funding!** This is big positive as NHB offersthe lowest cost fund for all HFCs. This also shows that most of the loans given by Canfin will be below 15 lacs. (NHB gives 76% of its total fund to this loans size only). There is a mention of “Provision for Expenses includes provision made for interest on NHB borrowings of ` 37.57 cr (previous year NIL)”. I suspect this has resulted in high other expenses. Need to understand what exactly it is.
Employee exp and other exp grew by 41% and 67% respectively. The branch expansion would have increased the cost. Also there is mention of refurbishing the existing branches to make the customer experience better…not a bad move.
**Cap Adequacy Ratio **)- this is at 14.72%. HDFC Sec report has not considered any equity dilution in its FY14 projections for Canfin. The positive thing about Canfin’s cap adequacy is that unlike all other HFCs its entire capital is Tier-1 Capital. So I think it will raise fund this year without diluting equity using the Tier-2 capital route.
The company seems to be much more focused on growth than it ever was - guided for 85 branches this year.During the year Company has recruited 61 Junior Officers. Has mentioned “Your Company has drawn a challenging business plan for 2013-14 and a vision document for future years as well” (this is not usually the case with this PSU).
I am a bit confused as to why the interest expense went so high inspite of the huge NHB funding. My guess is that the benefit of NHB funding will be seen in FY14.
As Jatin mentioned there is talk of pressure on spread this year. But to me it looked more like a cautionary statement. Canfin has the best ratings and with NHB support should be able to do well in the cost of funds column.
Overall my projection is for an EPS growth of atkeast 30% and BVS growth of 20%. At FY14 E BVS of Rs 220-230 Canfin looks quite attractive…wishthe management could give us better understanding on the fund raising and costs involved.
Unlike peers you cannot find any mention of NIM, Spread, Average Loan size, Number of loans, Cost of fund etc anywhere in the annual report and there are no conference calls. The com has to come out with more information for better valuations.
But even at this state it deserves a P/B of atleast 1 times with great asset quality and expected increase in ROE.
One should view Canfin as a “new” company in early growth phase…even Repco is older than Canfin in that sense that it has already shown high growth in last 5 years. The ROE, Spread etc will only improve for Canfin.
Views Invited
Vinod M S
hi vinod,
thanks for the detailed update,made me go through the report again,
1). can you please help me with the NIM calculation,i did it this way,took the average of loan outstanding at the end of year 2012 and 2013,similarly interest income and interest paid and did the claculations got 2.68%.is that right?
2). Provision for real estate assets mandated by NHB-commercial real estate 1% and residential 0.4%,this was there last year also,i understand this provision is in addition to the provisioning for NPA’s.
3). saw in the annexures loans below 15 lacs-1821.71 cr and loans above 15 lacs-1960 cr,is whereas in the previous year it was 1501 and 1097 cr,is there some misunderstanding in the premise that it mainly provides small ticket loans below 15 lacs.Iam not sure if anybody can buy property in banglore with a loan less than 15 lacs and hence a conscious change to attract a wider audience.
would you be going for the AGM?
Thank you Vinod for the details and your opinion.
…
Hi Biju,
Thank You!
Yes your NIM logic is right. Just cross check the nos...let me know if there is any gap.
| Projection FY14 | ||||||
| FY11 | FY12 | FY13 | Growth | FY14E | Growth | |
| Interest Income | 226 | 279 | 379 | 36% | ||
| Interest Expense | 154 | 195 | 283 | 45% | ||
| Net Interest Income | 72 | 84 | 96 | 14% | 138 | 44% |
| FEE Income | 4.96 | 6.93 | 14.0 | 102% | 20 | 43% |
| Operating Expenses | 17 | 22.98 | 36 | 57% | 60 | 67% |
| Operating Profit | 59.96 | 67.95 | 60 | 98 | 63% | |
| Provisions & Contigencies | 1.46 | 7.3 | ||||
| Net Profit | 42 | 44 | 54 | 88 | 63% | |
| No of Shares | 2.05 | 2.05 | 2.05 | 2.05 | ||
| Basic EPS | 20.5 | 21.4 | 26.4 | 23% | 43.0 | 63% |
| BV/share | 152 | 170 | 192 | 13% | 230 | 20% |
| Disbursements | 472 | 859 | 1814 | 111% | 2540 | 40% |
| O/S Loan Book | 2207 | 2674 | 4016 | 50% | 5806 | 45% |
| Dividend | 2.5 | 3 | 4 | 33% | 5 | 25% |
| Cost to Income % | 24% | 27% | 38% | 44% | ||
| NIM | 3.3% | 3.4% | 2.86% | -17% | 2.80% | -2% |
| ROA | 1.95% | 1.80% | 1.62% | -10% | 1.80% | 11% |
| Gross NPA | 1.06% | 0.88% | 0.39% | -56% | 0.40% | 2% |
| Net NPA | 0 | 0 | 0 | 0 | 0 | 0 |
| Branches | 34 | 52 | 69 | 33% | 85 | |
| ROE | 13% | 15% | 20% | |||
Is Canara Bank making hay at the cost of their hapless subsidiary Canfin Homes lending it at 10.25 or 10.5% base rate n Canfin Inturn doing lazy banking n lending to safe salaried customers @ 10.75%.?
Which are the other sources of funds other than NHB for Canfin?
Will CanFin have to report mark-to-mark losses in 2nd quarter because of the rise in wholesale funding? Their cost of funding has gone up 2% recently.
