Prabhudas Lilladher has issued a “BUY” rating on Can Fin Homes (CANF) with a current market price of Rs. 871 and a target price (TP) of Rs. 1,000. The stock demonstrates a potential upside supported by solid earnings growth and a positive loan growth outlook. Can Fin Homes’ strong fundamentals, healthy asset quality, and favorable interest rate dynamics make it a compelling investment choice for medium- to long-term investors.

Target for investors: Rs. 1,000
Investment Horizon: Medium-term, with a focus on accumulating the stock for long-term growth.

Key Summary of the Report

Can Fin Homes reported a positive quarter for Q2FY25, surpassing expectations in several areas such as Net Interest Income (NII) and Net Interest Margin (NIM). A PAT of Rs. 2.12 billion, representing a 33.8% YoY growth, exceeded forecasts due to improved yields and cost management. Despite a challenging macroeconomic environment, the company's loan growth was on track, driven by favorable funding costs and a growing focus on self-employed (SENP) borrowers. AuM growth is targeted at 13-15% for FY25 and 15-17% for FY26, supported by strategic geographical expansion and market initiatives.

Financial Performance and Earnings Growth

1. NII and NIM Surprises Positively
Can Fin Homes reported an NII of Rs. 3.4 billion in Q2FY25, beating expectations and reflecting a 7.3% YoY increase. The calculated NIM also improved sequentially by 8 bps to 3.65%, supported by favorable loan yields and efficient management of funding costs. This was primarily driven by an improvement in the yield on advances, which increased to 10.92%, and a lower cost of funds at 7.64%. The management has effectively leveraged lower-cost borrowing to enhance profitability.

2. Loan Growth in Line with Targets
Loan growth for Can Fin Homes was steady at 9.7% YoY, with disbursals amounting to Rs. 23.8 billion in the quarter. The company's guidance suggests further upside potential, with an expected loan growth of 13-15% for FY25 and 15-17% for FY26. Can Fin Homes aims to reach Rs. 100 billion in disbursals for FY25, setting the stage for a robust AuM growth trajectory over the coming years.

Asset Quality and Provisions

1. Stable Asset Quality
Asset quality remained robust, with Gross Stage 3 (NPL) ratio improving to 0.88% from 0.91% in Q1FY25. The company maintained a solid Provision Coverage Ratio (PCR) of 46.3%, reflecting prudent risk management practices. Provisions were also lower than expected, amounting to Rs. 137 million compared to the estimated Rs. 150 million, contributing to the company's strong bottom line.

2. Lower Provisions and PAT Growth
With provisions significantly lower compared to previous quarters, Can Fin Homes reported a PAT of Rs. 2.12 billion, surpassing estimates by 4.2%. This robust profitability was driven by a combination of higher NII and lower provisions, leading to a PAT margin of 18.0% for the quarter.

Growth Outlook and Strategic Initiatives

1. Targeting Higher Loan Growth
To achieve its FY25 and FY26 loan growth targets, Can Fin Homes is focusing on deepening its geographical footprint and increasing its market share in the Self-Employed Non-Professional (SENP) segment. The SENP sector now accounts for 30-35% of incremental lending, which should continue supporting yields. Management also aims to optimize the Salaried vs. Self-Employed Mix, targeting a comfortable balance of 65:35, up from the current 71:29 ratio.

2. Technology-Driven Expansion
The company has launched several initiatives to enhance operational efficiency and reduce turnaround times for loan processing. These include the implementation of a Loan Origination System (LOS) and Loan Management System (LMS), with further IT transformation projects planned for FY26, involving investments of up to Rs. 2.5-3 billion over the next seven years. These technological advancements are expected to drive growth, improve service quality, and support the company's long-term objectives.

Levers to Support NIMs

1. Favorable Funding Costs
Can Fin Homes has secured funding from the National Housing Bank (NHB) at a lower cost, further cushioning its NIM against potential repo rate cuts. With 45% of borrowings linked to repo rates, any future cuts should immediately benefit the company’s funding costs. Additionally, the increased lending to the higher-yielding SENP segment will help sustain yields in the coming quarters.

2. Focus on Cost Control
Operating expenses increased 2.4% above expectations, mainly due to higher staff costs and actuarial valuations. However, management remains confident that cost-to-income ratios will stabilize at 16.0-16.5% before the full implementation of the IT transformation project, and marginally rise to 17% post-implementation.

Risks and Challenges

While Can Fin Homes is well-positioned for growth, potential risks include macroeconomic volatility and interest rate fluctuations, which could impact both lending and borrowing costs. Additionally, while the company has managed to maintain a stable asset quality, any deterioration in the SENP portfolio could pose challenges, especially given the relatively higher risk profile of self-employed borrowers.