Can Fin Homes Ltd - Is Growth Around the Corner?

A leading Housing Finance company with a demonstrated history of superior asset quality and consistent low cost funding owing to the strong backing of Canara Bank.

Can Fin Homes Ltd (CFHL) is one of the leading companies in the housing finance sector, promoted by Canara Bank (30% stake), a public sector bank.

CFHL offers housing loans for individual homes and affordable housing along with composite, and top up loans. It also offers non housing loans including mortgage loans, site loans, loans for commercial properties, personal loans, and education loans.
Can Fin Homes Ltd has a pan India presence with 165 Branches, 21 Affordable Housing Loan Centers and 14 Satellite Offices spread over 21 States and Union Territories. It is a key player in Housing Finance Sector in India and one of the few institutions permitted to accept Public Deposits.

The Company’s focus has mainly been on Housing Loans to individuals with 90% of loan book comprising Housing Loans and 10% Non-Housing. Average Age of its incremental borrowers is around 40 years and are by and large first-time home buyers.
CFHL’s Laser-Sharp focus on asset quality has resulted in best-in-class GNPA ratio of sub~1% over the years. It is one of the lowest cost borrowers in the HFC space because of strong backing and shining asset quality. Low cost of funds has allowed CFHL to grow its loan book even when it faces stiff competition from banks who have tended aggressively towards housing loan when other segments have underperformed.

CFHL’s loan book growth has slowed for past couple of years as it has focused on maintaining best in class asset quality. In Q2FY22, the company disbursed 2280 crores of loans and management has indicated that this run rate should inch up further. There are other structural reasons to be bullish on this sector as some long-term tailwinds are expected to drive the growth for the real estate sector further.

Structural Drivers of the real estate sector in India:

The real estate sector has witnessed some structural changes over the past 4-5 years but things have started to look up now. Covid 19 challenge is hopefully behind and strong HFCs should continue to ride the momentum underlying the real estate sector.
Low penetration, better affordability along with several other factors support the bullish thesis on the sector.

Rising Affordability:
The HFC sector stands to benefit from rising affordability of houses thanks to rising income level and stagnant or modestly increasing real estate prices. Affordability, which is calculated as a ratio of property prices to income, has been improving. The ratio of property price to income has gone down to 3.5 X in FY 2019 from 22 X in FY 1992.

Low Mortgage Penetration:
India’s housing finance market still remains under penetrated with mortgage to GDP ratio at 10%. This is significantly low when compared with several developed and even emerging economies. Housing credit has significant headroom for growth as it will catch up with the western peers.

Rapid Urbanisation and Nuclearization:
India is moving forward on the path of economic prosperity. Increase in contribution of service sector in the country’s GDP has led to people moving towards urban areas. This has stimulated demand for housing in these areas. The change in demography is also favourable for the housing sector overall. By 2031, 80% of Indians will be below the age of 60 of which 64% will be between 15-59 years. 40% of Indian population will be living in cities by 2030 according to a recent study by an industry thinktank. This has the tendency to stimulate and keep the housing demand elevated for times to come.

Favourable Policies:
The government of India has been taking several steps to tackle the challenges faced by the housing and real estate sector.
The launch of Pradhan Mantri Aaawas Yojna (PMAY) has provided a major boost to the sector. PMAY (Urban) was launched on June 25, 2015 for implementation during 2015-2022 to ensure housing for all. The mission provides central assistance to agencies through States/Union Territories and Central Nodal Agencies for providing houses to all eligible families against the demand of 11.2 Mn houses.

In continuation of its efforts to support housing for all, the government launched Credit Linked Subsidy Scheme (CLSS). Under the scheme, interest subsidy of up to Rs 2.67 lakh per house is admissible for beneficiaries belonging to Low Income Group, Middle Income Group I and II seeking housing loans from Banks, HFCs and other institutions for acquiring/constructing houses.
The interest subsidies of 6.5%, 4% and 3% on loan amount up to Rs 6 lakh, Rs 9 lakh and Rs 12 lakh are admissible for a house with carpet area of up to 60, 160 and 200 sq. meter for LIG, MIG I and MIG II, respectively. The MIG scheme was extended up to March 31 2021 (earlier March 31 2020). The scheme has further been extended by one year. The benefit for LIG under CLSS works out to maximum Rs 6 lakh for a 20-year loan. Besides the flagship initiatives, other measures have been taken to support the sector. These include tweaks in GST rates, income tax reduction, cut in stamp duty by several state governments etc.

Why Can Fin Homes?

AUM:
CFHL’s AUM grew at a 7% CAGR between FY07-12. The growth accelerated between FY12-17 and AUM grew at a CAGR of 38%. The growth slowed down after FY17 as the sector faced a number of headwinds and CFHL tried to protect its asset quality. The AUM growth during FY17-21 was 14% CAGR.

The management in recent times has been optimistic on much better growth going forward. This is vindicated by highest ever disbursements in Q2FY22. The disbursements in H2FY22 should be much better and that momentum should continue in FY23 as well. The ability to borrow at industry leading rates and the willingness to pass on the benefits to customers should greatly benefit CFHL.

Interest Income and Margin:
CFHL has shown tremendous control over its funding costs given its diverse funding profile and backing of a strong PSB. It has also been able to pass on any increase in borrowing costs to consumers. Net Interest Margin (NIM %) has consistently stayed above 3% and near 3.5% over the last 4 years.

Net Interest Income (NII) has grown at a CAGR of 28% between FY15 and FY21, from 178 crores to 781 crores.

Focus on Retail Home Loans:
CFHL has concentrated on Home Loans mainly to preserve asset quality. Home loans have enhanced security due to sentimental values attached with owning a house which pushes customers to stay prudent with servicing obligations on time.

The management’s focus on housing loan has led to home loans making 90% of CFHL’s loan book. The non-home loan proportion is 10%. The non-home loan segment can further be bifurcated into top up loans, Loan Against Property (LAP), loans for sites and builder loans.
A top up loan (3.6% share) is an additional loan given to a home loan customer after a certain period, depending on the repayment track record. LAP contributes about 4.6% to loans and the average ticket size in LAP is less than Rs 10 lakh.

CFHL’s book comprises of 100% retail lending as the company does not do any builder/corporate loan. CFHL operates in the Rs 0-25 lakh ticket size with this segment contributing 70% to the total portfolio. Also, the company has 54% of loans in the Rs 10-25 lakh bracket which has seen the lowest stress. Salaried, self-employed mix in terms of profile is 73% salaried and 27% self-employed. Within salaried, split between private and Government employment is equal at 50:50.
The focus on self-employed has only gained momentum in recent years. Over the past five years, the share of self-employed customers has nearly doubled. This has helped in maintaining the growth when banks have chased this segment heavily.

Low Cost of Funds
CFHL has a leading PSB, Canara Bank, as its promoter. This, along with pristine asset quality, has led to best borrowing standards. CFHL has been able to borrow at the lowest rate in the HFC space, even lower than LICHFL and HDFC. In order to derive the maximum benefit of competitive interest rates, the company has diversified its funding profile through a combination of short term and long-term debt. While short term borrowing helps to reduce the cost of funds, longer term funding helps to stabilize the Interest rate volatility. CFHL’s borrowing sources include debt market instruments, bank borrowings, National Housing Bank (NHB) refinance and public Deposits.

CFHL has increased the usage of Commercial Papers (CPs) which is not favourable from ALM perspective as CPs are shorter term instruments. The management has however stressed that it uses CPs only for cost leverage and only to the extent of the undrawn bank lines.

Return Ratios:
Stable interest margins, controlled costs and operating efficiency has led to CFHL delivering superior return ratios. CFHL’s Return on Asset (ROA) has constantly remained around ~2%. CFHL has consistently delivered Return on Equity (ROE) superior to other HFCs (FY21 ROE of 19.2%). Apart from the above mentioned factors, CFHL’s leverage which is on the higher side has aided ROE, though the trend is declining.

Operating Efficiency:
Over the years, CFHL has implemented several technology initiatives to improve its operational efficiency. It has implemented C KYC (Central KYC) which acts as centralized repository of KYC records of customers in the financial sector with uniform KYC norms and interusability of the KYC records across the sector. All the branches and the Registered Office are linked through a core banking platform (Integrated Business Suite) under the ASP Model.

Its Cost-to-Income ratio has been on a declining trend consistently.

Asset Quality:
CFHL has kept its focus on maintaining asset quality. The company has been very selective in its exposure. Collateral evaluation is done with a focus on residential and commercial property. No alternate collaterals are accepted. Mostly, declared income is considered for assessment on which all variance is based, surrogate income is not accepted. The company has given up some growth to preserve its asset quality.

Challenges:

Geographical Concentration:
CFHL’s major operating area is South India South India currently accounts for 70% of outstanding loans. Of this, Karnataka alone accounts for 30% of total loans. Thus, any unfortunate economic or political happening can risk the asset quality and slow the loan book growth.

Stress in Self Employed Book:
As the salaried class disbursement slowed, CFHL tried to increase the share of self-employed loans in its book but this has brought some stress on the book Covid 19 has severely impacted the business of self-employed customers thus some stress can be seen in this area.

Exit of Canara Bank:
CFHL has Canara Bank as its promoter. Having a strong PSB like Canara as its parent has helped CFHL to borrow at very competitive rates in the market. Canara’s exit can have significant impact on borrowing costs for CFHL.

Valuation

First a confession – I don’t know how to value financial companies, yet. I do know that P/B is the go-to ratio however. Find my attempt to value CFHL based on simple forecasts for the next two years. According to the valuation, it is trading at 2.3x the FY23E BV. Expensive? Cheap? Let me know the answer.

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