IBM Collaboration And E-Khata Resolution To Improve Future Operational Efficiency

Key Takeaways

• Resolving the e-khata issue and shifting borrowings is expected to reduce costs and improve revenue and net margins.
  
• Enhanced product focus and IT transformation could boost earnings, operational efficiencies, and cost management, positively impacting future growth.
  
• Challenges in registration, competition, and rising costs threaten to affect revenue, margins, and profitability for Can Fin Homes if not addressed.

Catalysts

Provides housing finance services primarily to individuals, builders, corporates, and others in India.

• The resolution of the e-khata issue in Karnataka is expected to improve disbursement growth and consequently AUM growth. This will likely enhance the company's revenue in the future.
  
• The shifting of bank borrowings from MCLR to repo rate or T-bills is anticipated to reduce the cost of borrowing, which would positively impact the net margins.
  
• The raising of ₹1,600 crores at a lower rate from NHB improves the cost of borrowing, thus increasing the net margins.
  
• Focus on SENP and LAP products is expected to enhance portfolio yields by charging higher interest rates, potentially boosting earnings.
  
• Major IT transformation project in collaboration with IBM is projected to improve operational efficiencies starting in 2025, leading to better cost management and potentially increasing net margins over time.

Can Fin Homes Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Can Fin Homes's revenue will grow by 14.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 63.5% today to 60.5% in 3 years time.
• Analysts expect earnings to reach ₹11.8 billion (and earnings per share of ₹88.45) by about January 2028, up from ₹8.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.0x on those 2028 earnings, up from 10.7x today. This future PE is lower than the current PE for the IN Diversified Financial industry at 25.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.95%, as per the Simply Wall St company report.

Can Fin Homes Future Earnings Per Share Growth

Risks

• The e-khata registration issue in Karnataka has led to a significant decline in disbursements, impacting AUM growth negatively. This could perpetuate if the situation does not improve quickly. [Affects Revenue]
  
• The demand challenges in Telangana, exacerbated by government reviews and cancellations, have led to a 33% decline in the region's disbursements, which could continue if real estate sentiment remains low. [Affects Revenue]
  
• Increasing competition for rate-sensitive housing loans, while currently subdued, could rise again, impacting Can Fin Homes’ ability to maintain its spread and NIM targets. [Affects Net Margins]
  
• The rise in SMA-0 reflects stress in customer cash flows, which could result in higher provisioning if not addressed, potentially affecting net earnings. [Affects Earnings]
  
• Upcoming IT transformation costs could increase operational expenses in the near term, impacting the cost-to-income ratio and overall profitability. [Affects Net Margins]

Valuation

• The analysts have a consensus price target of ₹895.71 for Can Fin Homes based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1050.0, and the most bearish reporting a price target of just ₹656.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹19.5 billion, earnings will come to ₹11.8 billion, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 13.9%.
• Given the current share price of ₹666.85, the analyst's price target of ₹895.71 is 25.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.