About Company:

Can Fin Homes has generated great wealth for its investors as it gave 29x returns over the last 10 years.

Can Fin Homes (CFH) is a deposit-taking NBFC providing housing finance to its customers in India. It has a strong parentage in the form of Canara bank which holds a 30% stake in CFH.

In recent years, the real estate sector has seen a real slowdown due to several issues. But the demand for affordable housing continues to be strong. Under the Pradhan Mantri Awas Yojna (PMAY), ~1.5 Cr affordable homes have been built in the last five years and ~1.95 Cr are being further built as part of Phase-II. Affordability has improved in the country over the years as the rise of disposable incomes outgrew growth in property prices. India also has a very low penetration of Mortgage as a % of GDP of just 10% compared to 26% and 50% in China and USA respectively. Growing young and working population, denuclearization of families and rising incomes are going to be drivers of growth for the industry over the long term.

CFH is a relatively small NBFC compared to its peers but has been growing at a phenomenal rate over the years. Over the period FY14-FY19, its Loan book grew at 26% CAGR while fresh approvals grew 15% CAGR. It is predominant in the Southern region as it has 71% of its Loan book from there. CFH has slowly and systematically grown in North and West India as well in the recent years. Network increased from 41 branches as of FY11 to 195 now. Of this Non-South network increased from 18 branches in FY11 to 76 presently.

While the company has grown at a very high rate, it has done so in a very prudent manner. It has laid down a strategy to manage risk and keep the asset quality under check while expanding. CFH has allocated 90% of its Loan book to housing loans and just 10% to riskier non-housing loans in which there are no major loans to builders. This non-housing loan percentage is the lowest in its industry. Of the total loan book, 71% is lent to salaried professionals and 28% to self-employed professionals. Such a high proportion of loans to salaried employees means there is a low probability of default in payments. CFH has systematically targeted geographies which have good repayment and credit culture.

CFH has focused its attention to catering to tier ll, tier lll and tier IV cities in recent years. While only 12 branches were added in metro regions over the last 3-4 years, 59 were added in non-metro areas. Consequently, Metro loan book grew at 9% YoY in FY20 while in non-metro areas it grew 28% YoY. It has kept the credit risk low by keeping the average ticket size at just Rs.18 lakhs. Further, Loan Against Property (LAP) loans are mostly given to the borrowers who have earlier availed a home loan with the CFH, and ticket sizes are comparatively lower (Rs.10 Lakh). >Rs.50 Lakh ticket sizes form just 4% of its total portfolio.

CFH has diversified its funding profile through a combination of short-term and long-term debt. It has been able to raise money at a much lower rate than its peers in the industry. Cost of funds stood at 7.88% which is among the lowest in the industry as its major Housing Finance Company (HFC) peers had to pay rates ranging between 8.1-9%. This has helped CFH consistently maintain its Net Interest Margins above 3% over the last 3 years. Its Cost to Income ratio has continuously decreased over the past few years. It has a low C/I ratio of 15.55% with HDFC having the lowest at 8.5%. CFH’s prudent Loan disbursement has resulted in very low NPA’s. It has Gross NPA of just 0.8% which is the lowest among its peers with HDFC having 1.3% and LIC Housing at 2.4%. Its net NPA is ZERO. The company had made necessary provisions to deal with NPA issues while many other major lenders struggled. It has a sufficient Capital Adequacy ratio of 22% against the mandated ratio of 12%.

These practices implemented by the company has resulted in Return on Equity (RoE) and Return on Assets (RoA) of 19.74% and 1.98% which are amongst the best in the industry.

HDFC is the market leader with 39.7% of the total loan of all HFC’s while CFH had a market share of just 1.8% as of June’19. But with many major HFC’s like DHFL and Indiabulls facing survival issues, there is a huge opportunity for CFH to consolidate market share. CFH expects to grow faster than the industry average of 10-11%. Its stringent loan distribution practices and robust business operations give it an edge over bigger HFCs like HDFC, LIC Housing and PNB Housing. CFH has laid down its vision to grow its loan book from Rs.20000 Crore currently to Rs.40000 Crore by FY22.

Final Thoughts:

Can Fin Homes has undoubtedly managed its risk well while expanding rapidly. But the slowdown in housing and issues related to liquidity in the lending sector has affected the industry’s growth outlook. Additionally, COVID impact on the economy has cast doubts in the mind of investors over HFC’s ability to avoid defaulting customers. This has resulted in CFH’s valuation taking a beating. But with prudent practices in place, CFH may be affected in the short term but would be able to gain market share once the crisis is resolved.

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