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Tuesday, November 1, 2016

Value Pick Stock: Can Fin Homes - ROI @ 95% in 8 Months

Dear Reader,

We are pleased to inform you that our Value Pick stock of February 2016 - Can Fin Homes Ltd (BSE Code: 511196, NSE Code: CANFINHOME) which was released on 29th Feb'16 is giving as on date returns of 95% to our Value Picks members in period of 8 months. We suggested Buy on Can Fin Homes at price of Rs. 955.70 on 29th Feb'16 with a target price of Rs. 1450. Stock has already achieved its target price and we informed our members to continue to hold the stock. We are glad to inform you, Can Fin Homes stock made its 52 week high of Rs. 1889.85 recently and closed at Rs. 1862.10 today giving absolute returns of 95% to our Value Picks members in period of 8 months.

In Sept quarter, net profit of Can Fin Homes rose 55.62% to Rs 55.06 crore as against Rs 35.38 crore during the previous quarter ended September 2015. Sales rose 26.17% to Rs 332.31 crore in the quarter ended September 2016 as against Rs 263.38 crore during the previous quarter ended September 2015.

Below is the summary of Can Fin Homes Ltd shared by us under Value Pick stock - Feb'16 released on 29th February 2016.

1. Company Background:

Can Fin Homes Ltd, set up under the sponsorship of Canara Bank, was incorporated in the year 1987. The main objective of setting up the company was promoting home ownership and increasing the housing stock in the country. It is the first housing company to be promoted by a nationalized bank in India.

Can Fin Homes Ltd is one of the top players in the housing finance sector, in the country today. The company has completed 28 successful years of operation in the field of home finance and has a renowned history of making profits and paying dividends continuously, since inception in 1987.

The company is having 110 branches and 27 satellite offices spread across 19 states / union territories. All these branches and satellite offices are linked to the Registered Office at Bangalore through a core banking platform. Being a south based company, 70% of its branches are located in southern India and the remaining 30% in Northern India.

The Company is offering a range of loan products, housing loans as well as non-housing loans, at competitive interest rates and designed to suit the needs of the customer.

The company is also one of the few housing finance institutions permitted by National Housing Bank, to accept deposits from public. The deposit schemes of the company are rated "MAAA" by ICRA, which indicates highest credit quality and carries the lowest credit risk.

2. Recent Development: (as on 29th Feb'16)

i) The Indian housing finance market has crossed the Rs. 10 trillion mark as on December 31, 2014, indicating a steady growth of 17% (annualised). Of this Rs. 10 trillion housing loan book, Rs. 6.3 trillion loans is with the banking sector and the balance Rs 3.7 trillion with HFCs/NBFCs. While the market continues to be dominated by the five large groups namely SBI Group, HDFC Group, LIC Housing Finance, ICICI Group and Axis Bank, accounting for 60% of the total housing credit in India as of December 31, 2014, there has been an emergence of a number of new HFCs in niche segments like affordable housing and self-employed customer segments, which have been growing at a faster pace.

ii) Though mortgage finance penetration levels in India have been increasing consistently, (8.24% as on December 31, 2014) they still remain low vis-à-vis developed countries. Given that there is a large proportion of population which is still underserved by the traditional financial institutions, there is still untapped potential for growth especially in certain segments like affordable housing.

iii) To promote growth in the affordable housing segment, while on the supply side, various state governments have introduced initiatives to encourage builders/developers to launch projects in the affordable housing space, on the financing side, relaxation of regulations for the affordable housing sector, and lower interest rates, long term bonds for affordable housing with relaxations on CRR/SLR requirements could improve the fund flow to the segment.

iv) Governments focus on affordable housing, favourable regulations could push overall housing credit growth above 20% in coming years, which could lead to improved mortgage penetration from current levels of 8.3%. Can Fin Homes is a dominant player in South India and is going through aggressive expansion by adding up branches / satellite offices in various states of the country. Moreover, company’s average ticket size of housing loan as of Dec’15 quarter is 17.3 lakhs. With various initiatives taken by the government towards affordable housing finance, Can Fin Homes will be the direct beneficiary.

v) Can Fin Homes has reduced dependence on Bank Loans from 56% in 2008 to 20% in December 2015. Company has reduced the cost of borrowing with strong AAA ratings for company’s borrowing programs. The changes in funding mix (reduced dependence on bank loans and increasing contribution of NCD/CP and NHB refinance) and improvement in credit rating have been helpful in expansion of net interest margins of the company.

3. Financial Performance:

Can Fin Homes standalone net profit rises 62.54% in the Dec'15 quarter

Net profit of Can Fin Homes rose 62.54% to Rs 42.18 crore in the quarter ended December 2015 as against Rs 25.95 crore during the previous quarter ended December 2014. Sales rose 31.12% to Rs 282.03 crore in the quarter ended December 2015 as against Rs 215.10 crore during the previous quarter ended December 2014

Can Fin Homes standalone net profit rises 91.76% in the Sept'15 quarter

Net profit of Can Fin Homes rose 91.76% to Rs 35.38 crore in the quarter ended September 2015 as against Rs 18.45 crore during the previous quarter ended September 2014. Sales rose 42.87% to Rs 283.38 crore in the quarter ended September 2015 as against Rs 198.35 crore during the previous quarter ended September 2014

4. Investment Rationale: (as on 29th Feb'16)

i) Housing Finance remains the most defensive in the financials space. The sector is preferred over banks & some other NBFCs, given its defensive characteristics, superior asset quality and consistency in earnings shown over many years. Also the ROEs have been amongst the most consistent. The mortgage business has a largely annuity nature of income with longer duration.

ii) Housing finance companies have an edge over the banks in terms of business focus and are leaner and more efficient. Mortgage finance forms part of business products portfolio for banks and hence lack focus and/or competencies. The focused approach help HFCs to have complete knowledge of the mortgage finance industry including borrowing habits, better asset liability mechanism etc and these competencies help them to maintain lower NPAs, better credit recovery ratios and improve cost efficiencies due to lower asset liability mis-matches. In the recent past, HFCs have improved their technology set-ups as well as marketing network using various business models like tie-ups, direct sales agents and cross-selling products.

iii) Can Fin Homes increasing focus on growth and recent aggressive expansion of its branch network has put it on a high growth path for the next few years. Company targets to grow its loan book to Rs.13,500 Crore (from expected Rs. 10,500 Crore by 31st March 2016) with number of Branches/Satellite Offices at 175 (from 140 now) by 31st March 2017. The company has planned to open 25 branches on 21st April 2016.

iv) The expected moderation in the interest rates is likely to increase demand for fresh loans and enable Can Fin Homes to maintain its growth momentum in the loan disbursements. Increasing demand, rapid branch expansion and strong growth in disbursements would enable the company to maintain growth momentum in its loan book.

v) Due to high credit rating, Can Fin Homes funding profile continues to remain strong. The company’s asset quality continues to remain healthy with Gross NPAs at 0.3% and Net NPAs being NIL. Going ahead, due to strong focus on retail segment, strict lending practices and strong recovery efforts, we expect Can Fin Homes asset quality to remain healthy.

vi) Can Fin Homes is the undisputed leader in asset quality among dedicated housing finance companies with a Net Non Performing Assets (NNPA) level of 0% since the last five years. Can Fin Homes has also been steadily bringing down its Gross NPA levels during the past few years, standing now at just 0.27%. Can Fin’s performance in asset quality is outstanding compared to its peer group companies like Gruh Finance, but also much larger players like Indiabulls Housing Finance.

vii) Can Fin Homes performance in both growth and asset quality is directly attributable to its sharp focus on retail housing loans that constitute 84% of its loans, as against developer loans that many of its peers undertake. Can Fin is also growing its loan book at a pace of around 30%, revealing that it is not sacrificing growth for asset quality. Moreover as per vision 2020 of the company, expected loan book size will be Rs. 35,000 crore with high asset quality with transparent and best ethical practices and prudent risk management practices.

viii) 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 company will continue to remain in high growth trajectory. Moreover, Can Fin Homes net NPAs are NIL and the company’s capital position is comfortable with its capital adequacy ratio being 21.14% in Dec’15 quarter and thus no equity dilution is warranted in near term.

5. Key Concerns & Risks:

i) Any sharp slowdown in the Indian economy could lead to slower growth in income levels and in turn could affect demand for housing and other real estate projects. Slowdown could also lead to higher NPAs.

ii) Being a small sized company, it is essential for Can Fin Homes to continue with its strategy of aggressively expanding its branches to maintain its growth momentum.

6. Saral Gyan Recommendation: (as on 29th Feb'16)

Can Fin Homes book value per share is Rs. 325. At current market price of Rs. 955.70, stock price to book value is 2.94.

Increasing urban population, lower mortgage penetration levels, increasing affordability, extension of interest subvention scheme leaves good scope for Housing Finance industry to penetrate and grow. Considering continued & rapid expansion of branches, growth sustainability and stable asset quality in coming years, Saral Gyan team recommends “Buy” on “Can Fin Homes Ltd” at current market price of Rs. 955.70 for target of Rs. 1450 over a period of 12 to 18 months.

Buying Strategy:
  • 70% at current market price of 955.70
  • 30% at price range of 840-870 (in case of correction in stock price in near term)
Portfolio Allocation: 4% of your equity portfolio. 

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