Shares of Can Fin Homes Ltd, a Bengaluru-based housing finance company that offers long-term housing loans to lower- and middle-income individuals, have doubled this year on the back of robust loan growth.
Given the real estate slowdown and unexpected floods in Chennai, will the growth sustain? The management expects the loan book to grow by 30% to around ₹ 10,600 crore in the current fiscal year compared with over 45% growth in the past few years.
“The disbursement growth is expected to be slower at around 10-11% at ₹ 3,700 compared with 30% in the last financial year because of muted demand from the prospective buyers and postponement of house purchases," said C. Ilango, managing director of Can Fin Homes. “Proposals have come down due to heavy rains and water logging in Chennai." Chennai contributes around 11% of the company’s business.
Competition from commercial banks is also increasing. Lending rates of commercial banks are lower by about 50 basis points because they have cheap source of funds through their CASA (current and savings accounts) deposit base. Even the balance transfer of home loans is affecting housing finance companies in an easing interest rate scenario, added Ilango. A basis point is one-hundredth of a percentage point.
Besides rising competition, the government’s housing for all scheme by 2022 has not seen material movement on the ground due to problems in land acquisition issues and costs.
Nevertheless, Can Fin Homes is making efforts to reduce its dependence on bank borrowings to improve its margins. It is borrowing more from the money market, which has helped it reduce the cost of funds. The company is also tapping other sources of fund-raising. It raised ₹ 275 crore at the end of March through a rights issue and another ₹ 100 crore from the corporate bond market in November. Over a third of the funding mix was from non-convertible debentures and commercial papers in the six months ended September, which it plans to increase by more than half by the end of this year.
The cost of funds is expected to come down to almost 8.5% from around 9.1% at the end of September, said Raj Gala from Edelweiss Investment Research. Net interest margins may continue to expand after rising to 3.1% at the end of the September quarter, helped by better funding mix, operating efficiency and strong loan growth.
Can Fin Homes is growing in other segments that are high-yielding, such as loans for commercial property, loans against property and personal loans to existing customers, which make up around 17% of its loan book.
The company’s capital adequacy ratio has increased to 20% from 17% after the National Housing Bank reduced the risk weightage on housing loans.
While Can Fin Home’s operating performance has improved greatly, there has been a considerable re-rating of the stock over the past one year. With return on equity expected to average at 16% over 2015-17 as per IIFL Holdings Ltd estimates, valuations have almost reached peak levels of 2.6 times 2015-16 earnings. Therefore, the upside may be limited in the near term, say analysts.
The writer does not own shares in the above-mentioned companies.