CANFINHOME - Can Fin Homes Ltd. Share Price

In the Q4 FY25 Earnings Conference Call for Can Fin Homes Limited, management provided an optimistic outlook for FY26, projecting a 20% growth in disbursements. Key highlights from the management's guidance include:

1. Disbursement Growth: The company expects to achieve a 20% growth in disbursements in FY26, with Karnataka showing signs of recovery and potential growth of over 20%. Telangana has also bottomed out, indicating a reversed trend with growth anticipated from its current low levels.

2. Karnataka Performance: Disbursements in Karnataka improved significantly in Q4, reaching around Rs. 300 crores in March, up from Rs. 150 crores in Q3. This was attributed to resolved registration issues and strategic shifts in lending approaches.

3. NPA and Provisioning: The management provided guidance on maintaining NPAs around 0.90%. The latest NPA stood at 0.87%, with provisions expected to be below 15 bps due to effective recovery measures and a prudent approach towards credit costs.

4. Branch Expansion: The company plans to open 15 new branches in FY26, enhancing its footprint primarily in the northern and western regions, bringing the total to approximately 249 branches.

5. Cost Control and Margins: The guidance for the current year includes maintaining a spread of 2.5% and a net interest margin (NIM) of 3.5%, with ROA expected at 2.1% to 2.2%. The cost-to-income ratio is projected to remain around 17% for FY26.

6. Impact of Interest Rate Cuts: Management indicated they would pass on the benefits of the increased efficiency in funding costs to customers gradually, emphasizing that their approach aligns with industry norms in response to changes in borrowing costs.

By fostering growth while keeping a close eye on asset quality, management expressed confidence in navigating the challenges ahead and achieving the outlined growth targets.

Question 1: "Sir, how are we going to ensure that SMA-1 and SMA-2 accounts don't flow forward? And what mechanisms are put in place for that?"

Answer: We have focused on educating our customers and enhancing our follow-up processes. We also increased our staff in branches with high SMA numbers and expanded our call center operations to ensure effective communication. We start following up on probable SMA accounts proactively and have instituted measures for better customer engagement to minimize rollover into SMA-1 and SMA-2.

Question 2: "And sir, my question is on management overlay. So what do we see as the benefit of topping up management overlay or even holding management overlay?"

Answer: The management overlay is a prudent measure to ensure we have a cushion against potential fluctuations. While our credit quality remains solid, maintaining an overlay of around 15 bps offers added comfort in times of regulatory changes or economic shifts. It's not indicative of major concerns but a strategy to bolster our balance sheet. We continue to assess and adjust based on our portfolio's performance and risk environment.

Question 3: "So my first question was on the cost of fund movement. Given the consecutive rate cuts, how do you see the cost of fund trending in FY26?"

Answer: With the recent 50 bps rate cuts, we've seen a reduction in our cost of funds. We expect a combined benefit of about 10 bps in the near term from our bank borrowings and commercial paper rates. We'll evaluate the next ALCO meeting to determine how much of this can be passed onto our customers while maintaining our expected margins.

Question 4: "So there's no impact on margin is what you're highlighting for the full year?"

Answer: Correct. We project that the adjustments won't affect our spreads despite passing on minor reductions to customers. Our overall focus remains on sustaining our margins and profitability targets, ensuring they align with our guidance of 2.5% spreads and 3.5% NIM.

Question 5: "How should we look at things evolving in the coming months related to e-Khata?"

Answer: The improvements in e-Khata processing, particularly in Bangalore, have led disbursements to rise significantly. We anticipate getting back to approximately Rs.275 crores per month disbursements. However, I expect some seasonal moderation in Q1 due to holidays. Overall, we foresee a swift normalization as the processes stabilize further.

Question 6: "So going ahead there will not be any reversal from the tax point of view, right?"

Answer: No, I believe the tax rate for FY26 will stabilize around 21%. After reevaluations and closure of assessments, we've clarified our tax position, and I expect consistency moving forward without further reversals impacting our fiscal situation.

Question 7: "Sir, could you just explain the difference here like for the full year it is closer to 20%?"

Answer: Our effective tax rate was reduced due to a correction regarding previously unaccounted benefits. We reversed excess provisions for tax earlier this year, impacting our lower current quarter tax rate. While we aim to maintain around a 21% effective tax going forward, the earlier years may have skewed this due to temporary adjustments.

Question 8: "And how will that happen like are there any macroeconomic challenges that you're facing?"

Answer: The macroeconomic challenges notably affected our disbursement growth, especially in Karnataka and Telangana due to regulatory changes and sentiment issues. However, we're optimistic that resolutions in e-Khata and improved conditions in Telangana will facilitate growth recovery across these markets.

Question 9: "What would be the cost-to-income next year?"

Answer: We expect our cost-to-income ratio for FY26 to be around 17%. While we are investing in IT transformation, greater expenses will only materialize in FY27. Thus for FY26, maintaining our current efficiency ratio is realistic.

Question 10: "How do you plan to tackle competition for repayment rates amid deposit rate cuts?"

Answer: We will pass on reductions from our borrowing costs to maintain competitiveness, particularly in our higher segments above Rs.50 lakhs. Retaining customers will involve strategic adjustments based on credit profiles, ensuring we remain appealing despite market competition.