Asset quality remained under control with gross non-performing assets (as a percentage of gross advances) at 0.63 percent against 0.66 percent in previous quarter and net NPA flat at 0.44 percent QoQ.
Housing finance company Can Fin Homes shares rallied 7.4 percent intraday Wednesday after Elara Capital advises accumulating the stock as second quarter earnings met its expectations.
"The stock has de-rated materially on disappointing growth & margin, and we believe the stock is currently fairly valued at 1.5x FY20E P/ABV and 9x FY20E P/E, with any positive surprise on margin as key for re-rating. Given the volatility, we reiterate accumulate rating with a target price of Rs 273," the research house said.
The stock lost 53 percent year-to-date and shed 30 percent during the quarter, especially after IL&FS-led liquidity crisis in non-banking finance companies including HFCs.
"With the recent mayhem affecting growth and margin for NBFC & HFC, we had already revised earnings for coverage universe and for Can Fin Homes. Given limited scope of earnings improvement on account of cost efficiency and already lower credit cost, we expect an earnings CAGR of 2 percent over FY18-20E," Elara said.
The research house sees earnings more sensitive to margins than growth for Can Fin and a significant change in margin is when it sees scope for an upward revision.
Can Fin Homes has reported a 7.6 percent year-on-year growth in second quarter profit to Rs 76.8 crore, and only 2 percent growth in net interest income to Rs 130.4 crore due to lower net interest margin and falling loan growth.
Cost of funds and lower yields have been hurting the net interest margin for the housing finance companies. Can Fin's NIM contracted to 3.17 percent in September from 3.64 percent in Q2FY19 and 3.26 percent in Q1FY19.
Spread has been trending lower, down 47bp YTD, to 2.16 percent. Management has been ahead of peers in revising interest rates, up 60-75bp since April, across products and customer segments, but competition and one-year reset policy are reasons why it is yet to be reflected in yields, down 34bp between April and September.
Elara expects yields to go up marginally, but a higher cost of funds will keep spread under pressure. It also expects spread to fall by 70bp YoY over FY18-20E to 1.9 percent by FY20E.
Asset quality remained under control with gross non-performing assets (as a percentage of gross advances) at 0.63 percent against 0.66 percent in previous quarter and net NPA flat at 0.44 percent QoQ.
Operating profit growth is slightly on the better side in Q2, rising 12 percent YoY and 6.5 percent QoQ to Rs 121.6 crore.
Can Fin Homes' disbursement growth during the quarter picked up to 7.1 percent YoY and 24 percent QoQ after falling to 1 percent YoY in Q1FY19, but loan growth was the slowest in last 9 quarters.
Loan growth for the quarter at 17.1 percent YoY, the lowest ever for the HFC, but QOQ loan growth was strong at 4.5 percent.
State-specific issues and slower pickup in affordable housing inventory remain cause for concern for regional HFC; the recent issues on funding have further accentuated growth concerns, said Elara which does not expect this situation to ease.
It believes management will revise down growth guidance from the current 24 percent for FY19E. "We build in 17 percent for FY19E and a loanbook CAGR of 16 percent over FY18-20E."
At 11:38 hours IST, the stock was quoting at Rs 235.35, up Rs 13.75, or 6.20 percent on the BSE.
