Stock Pick from Housing Finance

CHOICE SCRIP

HERE IS WHY

• Strong demand for housing loan as Government’s thrust on ‘affordable housing’ and ‘housing for all’

• Strong credit growth, stable NIM’s & healthy asset quality has led to robust return ratios

• Trading at cheaper valuation compared to its peers

FINANCING PORTFOLIO GAINS: Can Fin Homes

Housing finance in India is a multi-layered space where financiers exploit gaps in terms of geographies, customer segments, and average ticket sizes, to evolve niche strategies and tailor-made credit delivery processes. Smaller players create a niche, depending on their internal appetite for risk and growth to beat competition. Fine market segmentation creates enough opportunity for meaningful Housing Finance Companies (HFCs) to gain scale, drive profitability, and deliver superior returns. Can Fin Homes (CFHL) is one of such HFC that has created a niche.

CFHL is largely present in South India and has a network of 106 branches. Southern India has contributed nearly 74 per cent of the loan book till date. Besides, the branches are strategically located in Tier-I & Tier-II cities.Around 84 per cent of the loans are given to the salaried class with average housing loans ticket size of Rs 16 lakh which allows for interest subvention.

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The management is committed towards improving the asset quality of the company. Especially, under the new management since FY11, the asset quality has improved multi-fold. GNPA has improved remarkably from around 1.1 per cent in FY11 to 0.25 per cent in 9MFY15. The company expects the figure to remain stable at this level despite growing loan book. The improvement in the asset quality is due to higher concentration of loan book (92 per cent of loan book) towards retail Individual Housing Loans. Moreover, out of the individual housing loans 90 per cent belong to salaried class.

For the 9MFY15, CFHL reported 84 per cent rise in NII at Rs 125.4 crore. Bottom-line of the company improved by 62 per cent to Rs 63.4 crore on yearly basis. In FY14, Net interest income (NII) grew by 40 per cent from Rs 95.69 crore to Rs 134.29 crore. Even PBT grew by 42 per cent at Rs 106.65 crore and PAT grew by 40 Rs 75.71 crore.

Strong credit growth, stable NIM’s & healthy asset quality has led to robust return ratios with sustainable ROE and ROA’s at around 15 per cent and 1.6 per cent respectively over the last couple of years. Infusion of fresh share capital of Rs 280 crore in FY15 through rights issue at a price of Rs 450 per share will take care of funding needs till FY17.

The currently Price to Adjusted Book Value of the company is Rs 296 per share after considering the right issue. It trades at 2.06x Adj. BV which seems undervalued at these levels compared to its peers. In the light of excellent credit growth in last few quarters and brighter prospects for the housing finance industry, we recommend to take an exposure with a Target of Rs 900 based on 2.5x FY16E Adj. BV in the next one year.