Shares of Can Fin Homes have been under pressure in the last one year. However, brokerage firm Motilal Oswal Financial Services is optimistic about the stock.
Motilal Oswal has a 'buy' call on the stock with a target price of ₹630, implying a 29 percent in the stock price from the current levels.
The stock is down about 12 percent in the last one year against a four percent gain in the benchmark Sensex.
The brokerage firm highlighted while there could be near-term transitory compression in margins because of the delay in transmitting higher borrowing costs to the customers, the company can sustain NIM (net interest margin) of nearly 3.3-3.4 percent in the medium term.
"We model a loan book and PAT CAGR of 17 percent and nearly 19 percent, respectively, over FY22-FY25E. Can Fin Homes is a franchise with moats on the liability side and has always exhibited superior asset quality," said Motilal Oswal.
"For an RoA (return on assets) and RoE (return on equity) of 1.9 percent and 17 percent, respectively, in FY24E and triggers for valuation re-rating, if the new management team (of MD&CEO/CFO/CRO) can gain investor confidence, we reiterate our buy rating with a target price of ₹630 premised on 1.8 times Sep’24 P/BV (price to book value ratio)," said the brokerage firm.
A robust franchise is a key positive of Can Fin Homes.
Motilal Oswal pointed out Can Fin Homes is a franchise which has proven its astute underwriting, strong risk management, and inclination to deliver industry-leading loan growth in the mortgage secsztor over the last decade.
The brokerage firm added that unlike many of its other peers, Can Fin Homes does not have corporate or builder loans in its loan mix.
"It has very consistently maintained the share of home loans in its loan mix at around 90 percent for the last decade and has consciously stayed away from increasing the proportion of LAP (loan against property) despite the obvious benefits of better spreads and margins. Management in the past has shared that it plans to increase the proportion of LAP over the medium-to-long term," said the brokerage firm.
Can Fin Homes is able to highly lever its balance sheet which is aided by the underlying parentage of Canara Bank. While the average leverage has steadily declined, it has been hovering between 8.8-10.1 times over the last three years, thereby, allowing it to deliver consistently healthy RoEs, said Motilal Oswal.
The brokerage firm said Can Fin Homes has an enabling resolution to raise equity capital up to ₹1,000 crore, which could potentially be in the form of a rights issue.
But there are some risk factors too.
Motilal Oswal pointed out that the biggest risk (not that it is imminent) is the change in parentage for Can Fin Homes which is relevant since the government has been asking state-run banks to review their non-core businesses.
Moreover, the brokerage firm believes without the parentage of a large group or a PSU undertaking, it will be difficult for Can Fin Homes to maintain high leverage on its balance sheet.
Another risk is the company’s inability to identify a credible successor (MD/CFO). In the worst case, the parent Canara Bank might have to depute someone from the Bank to lead Can Fin Homes. While the probability of this is very low, we do not see this event having any significant impact on our investment thesis at Can Fin Homes, said Motilal Oswal.
According to a MintGenie poll, an average of 11 analysts have a ‘strong buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.