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Ashika Research - Equities Can Fin Homes Limited June 062014 Company Description Can Fin Homes is a 26 year old housing finance company registered with the NHB and headquartered in Bangalore. The company is promoted by Canara Bank in the year 1987 which owns 42.38% shareholding of Can Fin homes. It predominantly lends to individuals which comprises of 93% of loan book with an average ticket size of Rs 16 lakhs. It has a pan India presence with 83 branches in over 15 states of which 42 branches were added in the last three years. Further, more than 80% of its branches are located in tier 1 and 2 cities. Can Fin Homes enjoys 5 star rating from NHB for the refinance. Investment Rationale Strong presence in South India Recommendation Buy Target price Rs. 500 Closing price Rs. 357 Potential upside 40% Company Information BSE Code 511196 NSE Code CANFINHOME Bloomberg Code ISIN CANF IN INE477A01012 Market Cap (Rs. Cr) 745 Outstanding shares(Cr) 2.05 52-wk Hi/Lo (Rs.) Ashika Stock Broking Limited Headquartered in Bangalore, Can Fin Homes has a strong presence in South India where 4 southern states constitute about 70% of the loan book. Moreover, volume offtake in the realty space has been steady in Sothern parts of the country, led by Bangalore where Can Fin has a strong presence (16% of its branches in Bangalore and 70% in South India). Besides, the branches are strategically located in Tier-I & Tier-II cities and primarily cater to customers with loans average Rs 16 lakh which allows for interest subvention. Avg. daily volume (1yr. on NSE) 367/113 21888 Face Value(Rs.) Book Value 10 220 Relative performance chart (one year) Strong growth in loan book over the years The loan book for the Housing Finance Company (HFC) grew at a five year CAGR of 26% led by 52% & 53% five year CAGR in sanctions & disbursements respectively. The net profit has grown by 19% CAGR during the same period. Focussed approach, aggressive branch expansion coupled with well defined strategies has resulted in strong loan growth. Under the leadership of Mr. C. Ilango (MD), Can Fin Homes has aggressively expanded its loan book, recording a 38% CAGR in advances over FY11-14. In order to expand its reach in the cities, the HFC has expanded its branch network by 14 in FY14 and by 17 in FY13. The branch expansion will bode well for the company in order to sustain higher loan growth. In Rs. Cr. FY13 FY14 FY15E FY16E Net interest Income 96 134 189 240 NIM (%) 2.9 2.7 2.7 2.85 Operating Profit 77 107 142 182 PAT 54 76 93 121 EPS (Rs) 26 37 45 59 BV (Rs) 191 220 258 307 0.4 0.2 0.3 0.3 GNPA (%) Share holding pattern as on 31.03.2014(%) Source: Ashika Research 1008, Raheja Centre, 214, Nariman Point, Mumbai-400 021, Ph- 022 – 6611 1700, Extn. - 704 www.ashikagroup.com 1 Ashika Research - Equities Pristine Asset Quality The management has committed towards improving the asset quality of the company. Specially, under the new management since FY11, the asset quality has improved by multifold. Gross NPA used to languish in the region of 1.6% in FY07 to 1.1% in FY11. Thereafter, the asset quality improved consistently in each successive year with Gross NPAs at 0.2% and nil Net NPAs as of FY14. The improvement in the asset quality is due to higher concentration of loan book (92% of loan book) towards retail Individual Housing Loans. Moreover, out of the individual housing loans 90% belong to salaried class. Comfortable capital adequacy position The capital adequacy position of Can Fin Homes has always been comfortably above the statutory norm of 12% stipulated by national housing bank (NHB) since FY07. The capital adequacy ratio (CAR) for FY14 stands at 13.8%, comfortable but lower than the high of 19% witnessed in FY11. The mild reduction in CAR is due to high business growth within the same period and changes in the Ashika Stock Broking Limited rate of provision for Standard Assets in respect of commercial real estates. Strong return ratios over the years The HFC has been able to remarkably sustain return on assets (ROA) near 1.5% over the years while maintaining return on equity (ROE) of 13% or above, despite of that company being a consistent dividend paying one. The net interest margin (NIM) has declined to 2.7% in FY14 from 3.3% in FY11, due to higher cost of funds. ROA and ROE for FY14 stands at 1.5% & 17% respectively. In the recent years, the company clocked the highest ROA of 1.9% in FY10 & FY11. Thereafter, the focus of the company shifted to business growth and aggressive branch expansion thus impacted the operating expenses of the company as reflected by cost to income from 22% in FY11 to 28% in FY14. Housing sector in focus With the economy bottoming, the housing sector is expected to get a leg up from the pent up demand. With the improvement in economic activities and lower interest rate scenario & higher disposable income, the housing industry is expected to witness a spurt in demand and it is a long term positive for the sector. Further, there are expectations of incentives by the government in the home finance segment in order to revive the sector. 1008, Raheja Centre, 214, Nariman Point, Mumbai-400 021, Ph- 022 – 6611 1700, Extn. - 704 www.ashikagroup.com 2 Ashika Research - Equities Key risks Higher concentration (70% of loan book) in South India Change in management will have a negative bearing on the growth prospects for the company Increase in interest rates in the economy & higher competition to impact NIM adversely Outlook & Valuation Can Fin Homes is a strong play in the housing finance sector and the company has achieved a five year CAGR of 26% in loan book. The new management which took charge in FY11 has been revolutionary and pressed for higher loan growth at a CAGR of 38% in a difficult economic scenario without compromising the asset quality. The company has strong focus in South India, particularly Bangalore, which has been blessed with stable demand in real-estate markets. Besides, the company lends predominantly Ashika Stock Broking Limited to individuals belonging to the salaried class, which has resulted in spotless asset quality of the company over the years. With the new government in power and the subsequent bottoming out of the economy, the company is expected to witness a revival in demand in housing sector. At the CMP, the scrip trades at P/B of 1.16x FY16E book value & investors are advised to BUY the scrip for a target price of Rs 500, implying an upside of 40%. Disclaimer: This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Ashika Stock Broking Ltd., is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. Ashika Stock Broking Ltd. or any of its affiliates or employees shall not be in anyway responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Ashika Stock Broking Ltd., or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. “Ashika Stock Broking Ltd., and/or its affiliates and /or employees may have interests/positions, financial or otherwise in the securities mentioned in this report.” 1008, Raheja Centre, 214, Nariman Point, Mumbai-400 021, Ph- 022 – 6611 1700, Extn. - 704 www.ashikagroup.com 3