Karnataka E-Khata Resolution And Branch Openings Will Secure Future Potential

Key Takeaways

• Resolution of e-khata issue and branch expansion in key regions should drive disbursement growth and revenue.
  
• Improved asset quality and strategic loan portfolio adjustments aim to enhance margins and profitability.
  
• Rising competitive pressures and execution risks could impact Can Fin Homes' revenue, net interest margins, and long-term earnings amidst operational challenges.

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 lead to a recovery in disbursement volumes in that state, helping drive a 20% growth in overall disbursements for FY '26. This will positively impact revenue growth.
  
• The company's strategy to open 15 more branches in FY '26, particularly in growth regions, is anticipated to enhance its distribution network, resulting in increased loan origination and higher revenue.
  
• Efforts to improve asset quality, including active follow-ups on overdue accounts and a focus on reducing SMA-0, SMA-1, and SMA-2 accounts, are expected to lower credit costs and improve net margins.
  
• Management's confidence in achieving a stable net interest margin (NIM) of 3.5%+ in FY '26, even as they pass on some interest rate benefits to customers, suggests a focus on maintaining healthy earnings.
  
• The gradual adjustment in loan portfolio mix towards a higher proportion of non-salaried and non-housing loans is expected to offer better yields, thereby supporting net interest income and overall profitability.

Can Fin Homes Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Can Fin Homes's revenue will grow by 13.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 65.2% today to 63.6% in 3 years time.
• Analysts expect earnings to reach ₹12.3 billion (and earnings per share of ₹92.34) by about May 2028, up from ₹8.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.4x on those 2028 earnings, up from 11.1x today. This future PE is lower than the current PE for the IN Diversified Financial industry at 25.9x.
• Analysts expect the number of shares outstanding to decline by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.24%, as per the Simply Wall St company report.

Can Fin Homes Future Earnings Per Share Growth

Risks

• The company faces execution risks in terms of realizing its growth projections, especially with the ongoing challenges in Karnataka and Telangana, which could impact future revenue targets.
  
• SMA-1 and SMA-2 accounts require careful monitoring, and any failure to manage these can lead to higher provisions, affecting net margins.
  
• The management has increased the dividend payout ratio, which might limit the capital available for reinvestment, potentially impacting long-term earnings.
  
• Rising competitive pressures, especially from banks reducing deposit rates, could impact the company's ability to maintain its lending rates, thus affecting its net interest margins.
  
• The ongoing technology transformation planned for Q3 FY '26 may lead to operational challenges and costs, impacting profitability and net earnings in the short term.

Valuation

• The analysts have a consensus price target of ₹855.867 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 ₹1000.0, and the most bearish reporting a price target of just ₹750.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹19.3 billion, earnings will come to ₹12.3 billion, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 21.2%.
• Given the current share price of ₹715.45, the analyst price target of ₹855.87 is 16.4% 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.