Can
Fin Homes
Background
Canfin Homes Ltd was established in 1987 by Canara Bank,
HDFC and UTI. Canara Bank has the management control and has the guiding role
in all the policies. Canara Bank chooses CEO and MDs of the company. The
Company was listed in 1991, when home finance was a neglected part of the
economy. Now Mortgage Business has been growing at about 20% y-o-y even through
the economy has not been doing great. I think that this growth can be sustained
in the affordable housing segment for many years to come. The average size of
loans is about 20 lacs for Can Fin homes, which is priority sector lending (up
to a limit).
Source of Value
Till FY11 Can Fin was growing at a normal 15% rate, like GIC
Housing Finance and other government owned home loan finance companies. Canara
Bank Bank deputed Mr. Ilango as the MD and he started professionalizing the
company. Now the company has good customer service levels and is amongst the
fastest in loan approvals (on their website they advertise that they would
approve a loan in three days and sanction in week). The company has been
growing its book at 40% y-o-y since FY12 and has given guidance of a book size
of 11,500 crores for FY16.
The company has the lowest NPAs in the Home Finance NBFCs,
because more than 90% of its borrowers are salaried class and only 5% of
portfolio is Loan against property. That is, it chose lower profit margins to
higher NPAs. Now, perhaps the company feels confident and is slowly increasing
its share of Loans Against Property (LAP). The Net Interest Margin on LAP is double of that on pure Home Loans. I think that they will restrict the LAP to 20-25% of the
total portfolio, which should be fine even when we consider higher possible NPAs in LAPs.
Canara Bank would need about 25,000 crores of equity in next
four years to meet BASEL III guidelines. It is 1.5x of the Banks current market
capitalization. The Government has told PSU banks to sell non-core businesses
to raise funds. It would make sense for Canara Bank to create valuation in Can
Fin Homes and then monetize it to meet its net worth requirements. So, this could
be an interesting story for next 3 to 5 years. I think that Can Fin should grow
even if the current CEO is not at the helm.
Crystal Ball Gazing
I think that maintaining growth in book size would not be a
challenge for the company. The company has been growing at a rate of ~45% per
year for the previous 3-4 years and should manage to grow at ~40% for next
2 years. PNB housing finance, which is not listed, has grown at a rate of ~70%
over the same period. It is the strength of an existing network of the parent bank across the country that makes this kind of growth possible for Can Fin and PNB
Housing Finance. Can Fin should comfortably meet the guidance of 11,500 crore
book size in March 2016 and 16,000 crores in FY17. The number of branches has
increased from about 45 in FY12 to 110 at present. Earlier Can Fin was a
Bangalore based lender, but now it has branches all over the country. Post
FY16, the branch increase should stabilize and post FY 17, the book should grow
at the organic rate of 20-25% per annum.
Profit margins are harder to predict, but it should improve
given that the company is increasing the portion of higher yield loans like
LAP. Right now the interest rates are also very high, which puts pressure on
margins. The ROA is 1.2% at present. It has declined from 2% about 2 years back due to the cost of
rolling out new branches. It takes 9 months for Can Fin to breakeven a newly
opened branch. With gradually decreasing pace of opening of new branches, the
RoA should keep on increasing till FY17. RoA should cross 1.5% by FY16. More
aggressive home finance lenders have RoA of 2.5% to 3%. However, I would prefer a less
aggressive, but high asset quality lender to invest.
The Numbers
Let’s look at around March 2016, where there is good
visibility. After 18 months, (June 2016)
Book Size = 12,000 crores a
RoA = 1.5% b
Profits = 180 crores c
= a*b
Pessimistic Scenario (P/E
Ratio of a slow, inefficient PSU with poor customer service)
P/E Ratio = 12x d
Valuation
= 2160 crores e = c*d
Number
of shares = 3 crores f
Price
per share = 720 g = e/f
Conservative Scenario
(base case - P/E Ratio at a discount to average for HFCs)
P/E Ratio = 16x
Valuation
= 2880 crores
Number
of shares = 3 crores
Price
per share = 960
Optimistic Scenario (optimistic but quite possible – P/E ratio at average of the better firms in HFC sector)
P/E Ratio = 24x
Valuation
= 4320 crores
Number
of shares = 3 crores
Price
per share = 1440
Right now, the holding by P/E funds and institutions is only
2-3%, when it grows big enough to get their interest, or if the company does a
QIP in FY 17 to raise funds the P/E ratio can go to much higher than the
current level. To give you an idea of the possible upside, let’s consider their
loan book target of 16,000 crores for FY17, that is, after about 2.5
years. Let’s consider RoA of 2%, which
is possible given higher presence of non-salaried class where interest margins
are more than double. That gives profit of 320 crores. At average sector P/E of
24x, the company would be valued at 7,680 crores, that is, share price of over Rs. 2500.
Upcoming Rights Issue might cause volatility in stock price, but do not
forget to subscribe:
Can Fin has ~2 crore shares issued and subscribed. Current
share price is Rs. 500. In January rights will be given to existing
shareholders to acquire new shares. We do not know the number of shares and the
price, but the approval is for issuing 1 crore shares and mopping up Rs. 300
crores. This works out at Rs. 300 per share and the right to acquire 1 new
share for 2 existing shares. Let’s say that rights shares are given at Rs. 350,
then the investor who uses his rights will have 3 shares for Rs. 1350, that is,
his cost would be Rs. 450 per
share.
Even the pessimistic
scenario of Rs. 720 per share corresponds to a return of 60% after 18 months.
Infact, it is very hard to think of something reasonable that can make one lose
money if one can keep invested over a 2-5 year kind of time horizon. This is
why I like Can Fin so much, although other companies might give higher returns
in a bull market.
(It is interesting why equity is being raised by rights and
not QIPs. Can Fin said that they want to infuse money by rights and not QIP,
because they do not want other institutions to poach their company. They have
mentioned in the draft document that they would acquire the balance rights
shares if some existing shareholders do not pay to buy their rights shares. The
shareholding of Canara Bank would go up after rights issues. It is noteworthy
that Canara Bank is infusing equity in Can Fin while they are short of equity
themselves.)
Risks that I can see
Ilango is on a deputation from Canara Bank and his tenure
got over this year. He has been given extension in Can Fin till July 2015 and
the management has said that the matter of his further extension will be taken
up with Canara Bank at the right time. Canara Bank has been supporting Ilango
to create valuation for them and given that he has 2 more years of service
left, it would be foolish to remove him from Can Fin. But, no one knows the
future. Ilango has computerized all the branches and put good systems in place
including hiring contract employees. But, it is possible that in case he has to
leave early, the operations would be adversely affected.
In case Government says that they will fund all the equity
for PSU Banks to meet BASEL III, then the motivation of Canara Bank to monetize
Can Fin might disappear. But, considering the amount of money that would be
needed by the Government, it looks unlikely to me.
Disclosure J
(I had written the following for my friend.)
I am heavily invested
in this (relative to my poverty level) and hence my views will be very biased.
Take a look at it and let me know the potential risks that you can think of. I
have some research reports if you want. You might want to watch the latest
interview of Mr. Ilango.
http://www.moneycontrol.com/news/business/if-approved-see-rights-issuejanfeb-can-fin-homes_1236158.html “Our loan book size is growing at 44
percent and our bottomline is growing around 20-25 percent via net interest
income (NII). We will maintain the gross NPA .25%, but incidentally we would
like to add that we are striving hard to reduce it still further and our asset
quality and we have strengthened our follow-up mechanism. In fact our branch
managers, everybody has been given an extra sensitization on this subject
because Can Fin Homes means asset quality is the number one strength, which we
will maintain in future also because we are ahead of others in the industry. We
will maintain the number one position in the future also. I do not see any
pressure.”
