CAN FIN HOMES LTD- Initiating Coverage, CMP Rs.201, BUY, Target Rs.270 - Sushil Finance

STRENGTH: Impressive Business Growth, Secured Loan Book, Best-in-Class Asset Quality & Robust Return Ratios WEAKNESS:Regional Concentration (~70% business from South)

OPPORTUNITIES:Growing Business Prospects outside South, Operating Leverage Play THREAT: Interest Rate Volatility, Prolonged Economic Slowdown may lead to Higher Slippages.

Strong Growth Momentum to Continue

Focused approach, aggressive branch expansion coupled with well defined strategies has resulted in strong advances growth (3-year CAGR ~38%) wherein loan-book has increased from ~Rs.22 bn in FY11 to ~Rs.58 bn till date. Inspite of strong parentage (Canara Bank), CHL is a professionally managed NBFC with totally independent management from parent. Strategy to expand distribution network (~2x in 3 years to 85 branches) is likely to provide further impetus to advances growth going forward. Management anticipates the advances growth momentum to continue on back of ongoing branch expansion (FY15E – 105 branches) & expects loan-book to reach ~Rs.85 bn & Rs.105 bn by FY15E & FY16E resp. (our estimates for FY15E & FY16E is ~Rs.78 bn & Rs.98 bn resp.).

Low Risk Portfolio along with Operating Leverage Play to Drive Bottom-line Growth

Majority of advances (~92%) comprise of retail housing loans (~90% salaried) having lower default risk while others consist of LAP, LCP, Builder loan (very insignificant with ticket size
Stable Asset Quality with Robust Return Ratios despite Aggressive Advances Growth

Secured retail lending, lower ticket size advances (avg. 1.0 mn) coupled with prudent risk management has enabled CHL to maintain healthy asset quality over the last couple of years. Albeit continuous stress in the economy, its GNPA has improved remarkably from ~1.1% in FY11 to ~0.3% in 9MFY14 which it expects to remain stable at this levels despite growing loan book. Aggressive management approach of maintaining 100% PCR over the last 3 years along with much higher CRAR (~15%) compared to regulatory requirements offers adequate margin of safety in current environment. Strong credit growth, stable NIM's & healthy asset quality has led to robust return ratios with sustainable ROE & ROA's at ~15%+ & ~1.6% over the last couple of years. Moreover, the Company also has a strong dividend track record of uninterrupted dividend for ~25 years with average payout of ~16% over the last 5-6 years.

OUTLOOK & VALUATION

CHL has emerged as one of the fastest growing NBFC over the last 3 years with major focus on retail housing. Focused approach along with implementation of well defined strategies has helped it to grow at a much faster pace. Aggressive branch expansion in recent past is likely to aid strong advances growth going forward. Despite slowdown, we expect advances to grow at a CAGR of ~30% over FY14-16E. Secured loan portfolio along with prudent risk management is likely to keep asset quality intact. Strong fundamentals, robust return ratios coupled with stringent provisioning norms provides better comfort. Considering the sound business model & strong growth prospects, we feel the stock is trading at very attractive valuations compared to its peers & hence recommend 'BUY' with a price target of Rs.270.

Source : Equity Bulls

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