The finance industry is in a bit of a conundrum now with parts of the sector under stress such as retail unsecured, microfinance and vehicle finance, and at the same time experts seeing it as the only sector offering value opportunities in an expensive market (recent correction notwithstanding). In the past year, the Nifty Bank has delivered returns of 7.3 per cent, while indices such as Nifty Healthcare, Nifty Consumer Durables and Nifty IT have returned 24.5 per cent, 22 per cent and 17.4 per cent respectively.

While the sector isn’t expensive, investors need to pick stocks carefully as sometimes cheap entries may turn out to be costly exits. It is important to choose stocks with good asset quality, as the market seems to reward only such stocks in the long run. One such stock is Can Fin Homes.

Can Fin Homes operates in the housing finance subset of the industry, where the entire loan book is secured. The market opportunity is also large, with the housing finance space expected to grow at a compounded 15 per cent to ₹50 lakh crore by FY27 from ₹33 lakh crore as of FY24. Indian households giving precedence to savings in physical assets remains a structural growth driver.

Can Fin Homes’ loan book has grown at a CAGR of 14 per cent, its profits have grown at a CAGR of 20 per cent between FY19 and FY24, all the while maintaining top-notch asset quality. However, the stock has been going through a rough patch for a while now, correcting 28.3 per cent from its all-time high of ₹951.45. The possible causes are detailed later. Valuation, too, has cooled from 2.7 times trailing book value to around 1.9 times now. At this price, prevailing concerns triggering the current rough patch appear priced in and hence long-term investors can accumulate the stock on dips, given growth can rebound from FY26.

What works

Can Fin Homes is the fourth largest housing finance NBFC (by loan book) in the listed space with a loan book of ₹37,155 crore. It largely caters to prime housing finance, with loans of ticket size higher than ₹20 lakh constituting two-thirds of loans disbursed. Salaried borrowers account for 70 per cent of the customers, while self-employed and professionals account for the rest. The risk in such a business model is considerably less compared to that of affordable housing financiers. Also, the loan book is fairly diversified. Although minor, the company has been ramping up disbursals in its LAP (loan against property) product and to non-salaried borrowers, where yields are higher.

Loans from banks make for 56 per cent of the funding mix currently and 35 per cent of such loans are MCLR-linked. During Q3 FY25, the company has converted such loans to Repo-linked or T-Bill linked, meaning that any transmission of rate cuts by banks happens sooner, bringing cost of borrowing down. The company has also accessed a ₹1,600-crore refinance facility from the National Housing Bank (NHB), the blended cost on which is 7.6 per cent, a good 30-40 basis points lower than bank borrowings. NHB refinances accounts for 18 per cent of the funding mix. These measures will help preserve the spread, come rate cuts. Being a group company of Canara Bank (Canara Bank holds 30 per cent stake), helps the company get a AAA credit rating, which implies access to low-cost funds.

Growth hiccups

While growth has been robust over FY19-24, the disbursals in 9M FY25 grew a mere 4.2 per cent year on year. Q3 FY25 saw no disbursal growth. This is due to a couple of discrete events in two of the key States – Karnataka and Telangana, which account for about 30 per cent and 20 per cent of the loan book.

The Karnataka government has mandated e-khata (a document that recognises a property’s ownership) to bring down fraudulent property deals and to streamline property records. This e-khata system has been facing glitches, hindering property registrations.

Further, in Telangana, there has been a review of approvals (for construction) that the previous government had granted. There have been cases of demolition of buildings constructed on government-owned land or on water bodies, impacting the housing market sentiment in the State.

However, such issues appear temporary and likely to get better in due course of time. From long-term investing perspective, these factors are likely to get resolved in the near to medium term. Also, as these issues are lender-agnostic, there is little possibility of loss of market share. The management noted that Karnataka’s systems have improved lately. The systems are expected to be fully back on track, as any delays would only stall Karnataka’s stamp-duty revenue.

A better future

That said, the management has guided for a 15 per cent loan growth for FY26, with disbursals of ₹12,000 crore. Spread and return on equity (RoE) are expected to remain at 2.5 per cent and 17 per cent respectively. The company currently has 219 branches. Fifteen new branches are in the pipeline, with 11 expected to begin operations in Q4 itself. Cost to income ratio has been guided at a higher 18.5 per cent on the back of an IT transformation that will be underway starting H2 FY26.

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