Can Fin Homes Ltd:Annual Report 2023-24 Analysis

Can Fin Homes Ltd.: A Comprehensive Overview #

About the Company #

Can Fin Homes Ltd. (CFHL) is a housing finance company (HFC) promoted by Canara Bank.

• Year of Establishment and Founding History: Established in 1987 by Canara Bank.

• Headquarters Location: Bangalore, India.

• Company Vision and Mission: (This information is generally available on the company’s website or annual reports. Please check there for the most accurate and up-to-date information.)

• Key Milestones in their Growth Journey:

  • One of the earliest HFCs in India.
  • Established a wide network of branches across India.
  • Successfully navigated various economic cycles in the Indian housing market.

• Stock Exchange Listing Details and Market Capitalization: Listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). (You’ll need to check current financial websites like Google Finance, Yahoo Finance, or the BSE/NSE websites for the latest Market Capitalization.)

• Recent Financial Performance Highlights: (Refer to the company’s latest quarterly/annual reports and investor presentations for details on revenue, profit, and asset quality.)

• Management Team and Leadership Structure: (Information about the key management personnel (MD, CEO, CFO) and Board of Directors should be available on the company’s website.)

• Any Notable Awards or Recognitions: (Check the company’s website, annual reports, or press releases for any recent awards or recognitions they have received.)

Their Products #

• Complete Product Portfolio with Categories:

  • Home Loans: For purchase, construction, extension, and renovation of residential properties.
  • Home Improvement Loans: Loans for repairs and renovations.
  • Plot Loans: Loans for purchasing residential plots.
  • Loan Against Property (LAP): Loans against the security of existing properties.
  • Non-Housing Loans

• Flagship or Signature Product Lines: Home Loans constitute the core offering.

Primary Customers #

• Target Industries and Sectors: Predominantly focuses on individuals seeking home loans for residential properties.

• Geographic Markets (domestic vs. international): Primarily operates within India.

• Major Client Segments: Salaried individuals, self-employed professionals, and small business owners.

• Distribution Network and Sales Channels: Branch network spread across India, direct sales agents, and partnerships with real estate developers.

Major Competitors #

• Direct Competitors in India: HDFC, LIC Housing Finance, Bajaj Housing Finance, PNB Housing Finance, and other nationalized banks and NBFCs offering home loans.

• Comparative Market Share Analysis: (Requires accessing reports from research firms or financial news outlets that track market share in the housing finance sector.)

• How they differentiate from competitors: Focus on affordable housing segments, strong promoter backing (Canara Bank), and competitive interest rates.

• Industry challenges and opportunities:

  • Challenges: Increasing competition, interest rate volatility, regulatory changes, and credit risk management.
  • Opportunities: Growing urbanization, government initiatives promoting affordable housing, and increasing disposable incomes.

• Market positioning strategy: Focuses on the middle-income group and aims to provide affordable housing finance solutions.

Future Outlook #

• Expansion plans or growth strategy: Likely involves expanding branch network, increasing market penetration in existing markets, and leveraging technology to improve efficiency and customer experience.

• Sustainability initiatives or ESG commitments: (Check the company’s website or annual reports for any information on their ESG (Environmental, Social, and Governance) initiatives.)

• Industry trends affecting their business:

  • Rising demand for affordable housing.
  • Increasing adoption of technology in lending.
  • Regulatory changes in the housing finance sector.

• Long-term vision and strategic goals: (This information can be found in the company’s annual reports, investor presentations, or leadership interviews.)

Can Fin Homes Limited (FY2023-24) Performance Overview #

Three-Year Trend Analysis of Key Financial Metrics #

Analysis: #

• Positive Trends: Can Fin Homes has demonstrated robust growth in total income, net profit, and loan outstanding over the three-year period. ROE improves indicating the company’s ability to generate profits from shareholders’ investments. The high CAR reflects a strong capital buffer.
• Areas of Concern: The increase in both Gross and Net NPA ratios is a significant concern, signaling a deterioration in asset quality. The increasing Cost to Income ratio needs careful management to improve operational efficiency.

Business Segment Performance #

• Housing vs. Non-Housing Loans: The loan portfolio is heavily weighted towards housing loans (78% in FY24), with non-housing loans accounting for 21%. The focus is on affordable housing for the middle to lower-income customer segment.
• Salaried vs. Self-Employed: A majority of the loan disbursements (67% in FY24) are to the salaried class, demonstrating a preference for lower-risk borrowers. However, there’s a notable portion (28% of the outstanding loan book) allocated to the self-employed non-professional (SENP) category.

Major Strategic Initiatives and Their Progress #

• Geographic Expansion: CFHL is focusing on strategic growth, expanding its branch network, and deepening its presence, particularly in Southern India. This initiative aims to reach a larger segment of aspiring homeowners.
• Digital Transformation: The company is investing significantly in digital technology and IT infrastructure modernization. This includes automating loan processing, document verification, and enhancing customer experience through digital channels. The implementation of a new core banking solution is underway.
• Focus on Asset Quality: CFHL is strengthening its credit underwriting process, particularly for the SENP category. This is demonstrated by the improving CIBIL scores of the loan portfolio.

Risk Landscape Changes #

• Credit Risk: The increase in Gross and Net NPA ratios indicates a heightened credit risk, possibly due to economic conditions or challenges in specific borrower segments.
• Interest Rate Risk: While the company manages interest rate risk through a mix of fixed and floating-rate borrowings and lending, the changing interest rate environment is highlighted as a concern.
• Liquidity Risk: The company maintains a healthy liquidity position, exceeding regulatory requirements, which mitigates liquidity risk.
• Operational Risk: The Company reported instances of fraud during the financial year, highlighting operational risks, particularly within branch operations. The total amount involved in frauds during the year was ₹57.10 crores.

ESG Initiatives and Metrics #

• Environmental:
  • The company is actively reducing its environmental footprint through energy efficiency measures (LED lighting, solar panels) and waste management (segregation and recycling).
  • Exploration of financing green housing projects.
• Social:
  • Focus on financial inclusion by targeting low and middle-income groups.
  • CSR initiatives focused on healthcare, education, livelihood generation, and women’s empowerment.
  • Employee well-being programs, including health check-ups and diversity initiatives.
• Governance:
  • Strong internal controls and ethical governance practices.
  • Board of Directors with experienced business leaders.
  • Regular compliance evaluations and audits.

ESG Metrics: #

• CSR Expenditure: ₹13.91 Cr, benefiting 1,17,150 individuals.
• Employees Trained: 1,036, with 774:262 male-to-female diversity ratio.

Management Outlook #

• Positive Growth Outlook: The management projects an average growth rate of 18-20% for the next five years, driven by the increasing demand for affordable housing.
• Capital Infusion: There’s a recognized need to infuse Tier-1 capital to support growth and maintain comfortable Capital Adequacy and Leverage Ratios. Plans are in place to raise up to ₹1000 crore through various means.
• Technology Focus: Continued investment in IT infrastructure is planned to enhance operational efficiency.
• Increased Average Loan Ticket Size: Targeting an increase in the average loan ticket size from ₹22 lakhs to ₹27 lakhs by FY25.

Comparative Analysis with Industry Averages #

A precise comparison with industry averages is difficult with just the information provided in this text. Public reports and financial databases would be needed to obtain averages for:

• ROAA and ROE: Compare with other Housing Finance Companies (HFCs) to assess relative profitability.
• NIM: Compare with other HFCs to gauge efficiency in managing interest rate spreads.
• Gross and Net NPA Ratios: Crucial to benchmark against industry averages to understand the relative asset quality position.
• Growth Rates: Loan disbursement and outstanding loan growth should be compared to industry growth to determine market share changes.
• Cost to Income Ratio: The Company’s cost to income ratio 19.87% is significantly lower than the average range of 30% to 50% typically observed in many industries.

Overall Assessment #

Can Fin Homes has shown solid financial performance and growth, but it’s facing challenges in asset quality. The management’s focus on strategic growth areas, technology adoption, and risk management will be crucial for sustained success. Comparisons with industry averages across key financial and operational metrics, will allow a fuller assessment of its position relative to its competition.

Detailed Analysis #

Can Fin Homes Limited: Financial Analysis #

Balance Sheet Analysis: 3-Year Comparative #

(₹ in Lakhs)

Significant Changes in Major Line Items (YoY > 10%) #

• Loans: Increased by 10.74% YoY (from ₹3,119,333 lakhs to ₹3,455,156 lakhs), indicating growth in the core lending business.
• Bank Balances(other) Increased by 49.3% YoY (from ₹30,659 lakhs to ₹45,776 lakhs).
• Property, Plant and Equipment: Increased by 28.64% YoY (from ₹40,378 lakhs to ₹51,944 lakhs)
• Total Assets: Increased by 10.69% YoY (from ₹3,307,049 lakhs to ₹3,660,986 lakhs), reflecting overall business growth.
• Other non-financial liabilities Increased by 17.4%
• ProvisionsIncreased by 32.3% YoY (from 33,610 to 44,475)
• Debt Securities: Increased by 19.97% YoY (from ₹631,046 lakhs to ₹757,177 lakhs), signifying increased reliance on this form of borrowing.
• Borrowings (Other than Debt Securities): Increased by 7.89% YoY (from ₹2,221,906 lakhs to ₹2,396,958 lakhs).
• Deposits: Decreased by 46.66% YoY (from ₹434,934 lakhs to ₹232,010 lakhs).
• Total Liabilities: Increased by 9.98% YoY (from ₹2,931,471 lakhs to ₹3,223,944 lakhs).
• Other Equity: Increased by 19.24% YoY (from ₹362,065 lakhs to ₹431,722 lakhs), due to retained earnings and possibly other reserves.
• Total Equity: Increased by 19.1% YoY (from ₹364,728 lakhs to ₹434,385 lakhs).

Asset Quality Metrics #

Key Observations:

• Both Gross and Net NPA amounts and ratios have increased significantly year-over-year, indicating a deterioration in asset quality.
• The Provision Coverage Ratio (PCR) has decreased, meaning the Company has relatively less provision set aside to cover potential losses from bad loans.

Industry Benchmark Comparison: For well-managed Housing Finance Companies (HFCs), Gross NPA ratios are ideally kept below 2%, and Net NPA ratios below 1%. Can Fin Homes’ ratios, while still below these thresholds, are moving in the wrong direction.

Debt Structure and Maturity Profile #

(₹ in Lakhs)

Key Observations:

• Diversified Funding: Can Fin Homes uses a mix of debt securities (NCDs and CPs), bank borrowings, and deposits.
• Shift Towards Longer-Term Debt: A significant portion of debt securities and other borrowings mature beyond 12 months, indicating a move to manage liquidity risk.
• Subordinated Liabilities: The presence of ₹100,000 lakhs in subordinated liabilities (Tier II capital) shows an effort to strengthen the capital base.

Overall Assessment and Recommendations #

• Growth: Can Fin Homes is showing growth in its loan portfolio and overall assets.
• Asset Quality: The deterioration in asset quality (increasing NPAs) is a major concern. The Company needs to:
  • Strengthen its credit appraisal and monitoring processes.
  • Focus on recovery efforts for existing NPAs.
  • Potentially increase provisioning if the trend continues.
• Funding: The Company has a diversified funding mix. However, the decrease in deposits might indicate a shift in funding strategy or reduced depositor confidence. Monitoring this trend is important.
• Profitability: The increase in provisions will likely put pressure on profitability.
• Transparency: The Company provides good disclosures in line with regulatory requirements.

Further Analysis #

• Detailed breakdown of loans: Understanding the segments driving NPA growth is crucial.
• Capital Adequacy Ratio (CAR): Assess the Company’s buffer against losses (CAR is at 24.48%).
• Interest Rate Sensitivity: Analyze the impact of interest rate changes on the Company’s Net Interest Margin (NIM).
• Cost-to-Income Ratio: Evaluate operational efficiency (ratio mentioned as 16-17%).
• Examine the reason for the increase in Provision and NPA, and analyze the recovery measures.

Can Fin Homes Limited Financial Analysis: FY24 #

Revenue Breakdown #

Segment Breakdown #

• Housing Loans: 78% of loan portfolio in FY24 (79% in FY23).
• Non-Housing Loans: 21% of portfolio in FY24, including Commercial Real Estate (CRE) loans.
  • Loan Against Property (LAP): 5% of non-housing loans.
  • Top-up loans, personal loans and site loans: Remaining 7% of non-housing loans.

Geographic Breakdown #

• Southern India: 62% of branch network, 71% of loan book.
• Rest of India: 38% of branch network, 29% of loan book.

Growth Rate #

• Loan book portfolio grew approximately 11%, from ₹31,563 crores to ₹34,999 crores.

Disbursement by Category #

• Salaried: 67% of total disbursement (₹5476 cr).
• Self-Employed Non-Professional: 33% of total disbursement (₹2701 cr).

Cost Structure Analysis #

Major Cost Components #

• Interest Paid: Increased from ₹1,700.86 crore in FY23 to ₹2,231.39 crore in FY24.
• Staff Cost: Increased from ₹135.92 crore in FY23 to ₹176.48 crore in FY24.
• Other Expenses: Increased from ₹440.65 cr to ₹88.77 cr.

Operating Cost #

• Increased from ₹1,877.34 crore in FY23 to ₹2,488.35 crore in FY24.

Margin Analysis #

Net Interest Margin (NIM) #

• Conventional NIM increased from 3.36% in FY23 to 3.63% in FY24.
• NIM Including Processing Charges increased from 3.45% in FY23 to 3.73% in FY24.

Operating Profit Margin #

• Operating profit margin decreased form 31.56% to 29.40%

Net Profit Margin #

• Decreased from 22.65% in FY23 to 21.30% in FY24.

Interest Spread #

• Increased from 2.31% in FY23 to 2.53% in FY24.

Non-Recurring Items #

• One-time fraud incident of ₹4,050.71 lakh, related to misuse of cheque signing authority and manipulation of accounts. 100% provision made.
• Fraud of ₹0.427 cr committed by three individuals.

EPS Analysis #

Basic EPS #

• Increased from ₹46.65 in FY23 to ₹56.38 in FY24.

Diluted EPS #

• Increased from ₹46.65 in FY23 to ₹56.38 in FY24.

Cash Management Analysis of Can Fin Homes Limited #

Cash Flow and Liquidity Analysis #

Operating Cash Flow (OCF) Components: #

• Provided: Net Profit Before Tax, Depreciation, Impairment on financial instruments, Interest Expense, Interest Income.
• Needed But Not Fully Provided: Changes in specific working capital accounts (detailed breakdown of receivables, payables, other current assets/liabilities), provisions, and non-cash items (like share-based compensation, if any).

Investing Cash Flow (ICF) Components: #

• Provided: Purchase of Property, Plant, and Equipment, (Sale of Property, Plant and Equipment), Investment in Government Securities, Other Bank balances.
• Needed: Purchases/Sales of other investments (if any), details on any acquisitions or disposals of subsidiaries (none indicated in this report).

Financing Cash Flow (FCF) Components: #

• Provided: Short-term and Long term Borrowings, Issue of Debt, and Dividend Payments
• Needed: Details on share issuance/buybacks (none explicitly indicated).

Free Cash Flow Calculation (Estimation): #

Free Cash Flow, in its simplest form, can be estimated as:

FCF = OCF + ICF

Using, approximation from statement of cash flows:

• FY24 = (256.75 Cr) + (166.52 Cr) = (423.27 Cr)
• FY23 = (404.35 Cr) + (322.99 Cr) = (727.34 Cr)

Note: This is a very rough estimate.

Dividend and Share Buyback Trends #

Dividend Trends: #

• FY24: Interim Dividend of ₹2.00 per share and proposed final dividend of ₹4.00 per share, 300% overall dividend rate.
• FY23: ₹2.00 per share, 175% overall dividend rate.
• Payout ratio for 2024 is at 10.64% slightly higher than that of 2023 (7.51%), but lower than the 2020 ratio of 11.18%.

Share Buyback Trends: #

The report does not mention any share buyback program for the periods covered.

Liquidity Position #

The Company has a healthy liquidity position as per Capital Adequacy Ratio as on March 31, 2024 was at 24.48%, well above the regulatory requirement of 15%. It holds significant balances with banks in addition to liquid instruments.

Free Cash Flow Yield Trends: #

Free cash flow yield is calculated by dividing free cash flow by the market capitalisation. Based on the provided report, market capitalisation decreased from 2023 to 2024, from 10,084.56 Cr. to 10,074.50 Cr., resulting in 6.57% decrease.

Financial Analysis of Can Fin Homes Limited #

Profitability Ratios (3-Year Trends) #

• ROE: CFHL’s ROE is consistently strong and has been improving, indicating good returns for shareholders’ equity.
• ROA: Above the typical industry range and improving, signifying efficient use of assets to generate profit.
• NIM: Consistently Above industry standards and showing improvements.
• Operating Profit Margin & Net Profit Margin: Showed a slight decrease.

Leverage Metrics #

• Debt-to-Equity: The leverage is within a reasonable range for HFCs. The decreasing trend is positive.
• Interest Coverage: Cannot be directly calculated. However, given the stable profitability and controlled leverage, it’s likely to be at a comfortable level.

Key Takeaways #

• Strong Profitability: Can Fin Homes consistently outperforms typical industry averages in terms of ROE and ROA.
• Controlled Leverage: Debt-to-equity is within a reasonable, though slightly on the higher, range for the sector and is improving.
• Asset Quality: The low Gross NPA and Net NPA ratios are strong indicators of good asset quality and efficient risk management, placing CFHL well within the desirable range for the industry.

Financial Analysis of Can Fin Homes Limited (FY24) #

Revenue and Profitability Metrics with Growth Rates #

• Total Income: ₹3,524.69 Crores (FY24) vs. ₹2,743.13 Crores (FY23), Growth: 28.49%
• Net Interest Income (NII): ₹1,293.30 Crores (FY24) vs. ₹1,014.55 Crores (FY23), Growth: 27.48%
• Net Interest Margin (including PC): 3.73% (FY24) vs. 3.45% (FY23)
• Operating Profit: ₹1,036.34 Crores (FY24) vs. ₹865.79 Crores (FY23), Growth: 19.70%
• Profit After Tax (PAT): ₹750.70 Crores (FY24) vs. ₹621.21 Crores (FY23), Growth: 20.84%
• Return on Average Assets (ROAA): 2.28% (FY24) vs. 2.17% (FY23)
• Return on Equity (ROE): 17.28% (FY24) vs. 17.03% (FY23)
• Cost to Income Ratio: 19.87% (FY24) vs. 16.93% (FY23)
• Earning Per Share (EPS): 56.38 (FY24) vs. 46.65 (FY23)

Market Share and Competitive Position #

• Can Fin Homes positions itself as a “leading housing finance company” amidst “intense competition” from banks and larger HFCs, especially in Tier I and Tier II cities.
• Their strategy focuses on the affordable housing segment and expanding into Tier II and Tier III cities.
• A key challenge is managing borrowing costs and maintaining competitiveness.

Key Products/Services Performance #

• Loan Book: ₹34,999 Crores (FY24) vs. ₹31,563 Crores (FY23), Growth: ~11%.
• Housing Loans: Constitute 78% of the loan book.
• Non-Housing Loans: Make up 22% of the portfolio, including CRE loans, mortgage loans, personal loans, loans for commercial properties, and educational loans.
• Disbursements: ₹8,177 Crores (FY24) vs ₹8,947 Crores (FY23).
• Average Ticket Size: Increased to 25 Lakhs in FY 2024, aiming for 27 Lakhs by FY2025.
• Asset Quality:
  • Gross NPA: 0.82% (FY24) vs. 0.55% (FY23).
  • Net NPA: 0.42% (FY24) vs. 0.26% (FY23)
• Salaried vs. Self-Employed: 67% of disbursments in FY 2024 were to salaried class.

Geographic Distribution and Market Penetration #

• Pan-India Presence: 21 states, with 219 branches (207 branches and 12 satellite offices).
• Southern Focus: 62% of branches are in South India, accounting for 71% of the loan book.
• Expansion Strategy: Plans to expand further into Southern India while also expanding into “potential centers” in other parts of the country.

Operational Efficiency Metrics #

• Cost-to-Income Ratio: Increased to 19.87% (FY24) from 16.93% (FY23).
• Average Business Per Branch: ₹105.06 Crores in FY22-23.
• Average Business Per Employee: Increased from ₹18.32 Crores (FY23) to ₹19.87 Crores (FY24).
• Average yield on assets: Increased by 108 bps in FY2024.
• Interest Spread: Increased from 2.31% (FY23) to 2.53% (FY24).

Growth Initiatives and Challenges #

• Growth Initiatives:
  • Geographic Expansion: Opening new branches.
  • Digitalization: Investing in IT infrastructure.
  • Affordable Housing Focus: Targeting the affordable housing segment.
  • Green Housing: Exploring opportunities to finance green housing projects.
  • Increase in average ticket size.
• Challenges:
  • Raising funds through debt market for minimum compliance.
  • Fund Availability: Securing long-term funding at competitive rates.
  • Competition: Intense competition from banks and larger HFCs.
  • Interest Rate Volatility: Managing the impact of fluctuating interest rates.
  • Maintaining Asset Quality: Expanding into the self-employed and non-professional segments.
  • Managing NPA.

Risk Assessment of Can Fin Homes Limited (CFHL) #

Strategic Risks #

Intense Competition in the Affordable Housing Sector #

• Definition: Risks that affect CFHL’s ability to achieve its strategic objectives, including market position, growth, and long-term sustainability.
• Risk: CFHL faces increasing competition from banks and other Housing Finance Companies (HFCs), particularly in Tier I and Tier II cities. This puts pressure on market share and margins.
• Severity: High
• Likelihood: High
• Trend: Increasing
• Mitigation Strategies:
  • Geographic expansion into Tier II and Tier III cities and beyond, targeting the salaried segment.
  • Focus on improving asset quality and maintaining a strong loan portfolio, with a growing proportion of loans to the salaried class (67% of disbursements in FY24).
  • Emphasis on customer-centric services, faster loan approvals, and customized financial solutions.
  • Strategic focus on LAP and SENP.
  • Increasing average loan ticket size, growing the portfolio
• Control Effectiveness: Moderate
• Potential Financial Impact: Reduced net interest margins (NIM), slower loan book growth, and potential increase in NPAs if not managed effectively.

Dependence on Canara Bank #

• Risk: While being sponsored by Canara Bank gives the company advantages like competitive interest rates, it does increase the risk associated with dependence.
• Severity: Medium
• Likelihood: Medium
• Trend: Stable
• Mitigation Strategies: Increasing the borrowing from other sources such as NCDs, bonds and commercial papers.
• Control Effectiveness: Moderate
• Potential Financial Impact: Increased cost of borrowing, reduction of operational freedom.

Over-Reliance on Housing Loans #

• Risk: While CFHL has a diversified portfolio, 88% of its AUM (including CRE-RH) is linked to housing loans. A significant downturn in the housing market could disproportionately impact CFHL.
• Severity: Medium
• Likelihood: Medium
• Trend: Stable
• Mitigation Strategies:
  • Diversification into non-housing loans (currently 12% of AUM, including mortgage loans, personal loans, commercial property loans, and education loans).
  • Prudent underwriting and credit risk management to ensure asset quality.
• Control Effectiveness: Moderate
• Potential Financial Impact: Significant increase in NPAs, reduced profitability, and constrained growth if the housing market experiences a downturn.

Operational Risks #

• Definition: Risks arising from internal processes, people, and systems, or from external events.

Fraud and Misappropriation #

• Risk: Instances of fraud by employees in several branches, amounting to H 40.21 crore, and vendor fraud. There were also issues with duplicate share certificates being issued.
• Severity: High
• Likelihood: Medium
• Trend: Increasing
• Mitigation Strategies:
  • Strengthened internal control systems, including audit processes.
  • Enhanced monitoring of branch operations.
  • Remedial actions to avoid future occurrences.
  • Filed fraud reports with authorities/regulators.
  • Classified fraudulent accounts as NPAs and made 100% provision.
• Control Effectiveness: Moderate
• Potential Financial Impact: Direct financial losses, reputational damage, potential regulatory penalties, and increased provisioning.
• Quantitative Risk Metrics:
  • Value of frauds reported: 57.10 crores
  • 100% provision made for fraudulent loan accounts.

IT Systems and Cyber Security #

• Risk: Reliance on IT systems for core banking operations. Any failure or breach could disrupt services, compromise data, and lead to financial losses.
• Severity: High
• Likelihood: Medium
• Trend: Increasing
• Mitigation Strategies:
  • Implementation of a new core banking solution.
  • Cyber Security Policy and Cyber Crisis Management plan.
  • Regular penetration and vulnerability testing.
  • Employee training on cybersecurity.
  • Use of Multiprotocol Label Switching (MPLS) links for security and uptime.
  • Business Continuity Plan (BCP) and Disaster Recovery Plan (DRP).
• Control Effectiveness: Moderate to High
• Potential Financial Impact: Operational disruption, data breaches, regulatory penalties, reputational damage, and costs associated with system upgrades and security enhancements.

Financial Risks #

• Definition: Risks related to the Company’s financial stability, including liquidity, interest rate, and credit risks.

Credit Risk #

• Risk: Risk of borrowers defaulting on their loans.
• Severity: High
• Likelihood: Medium
• Trend: Increasing
• Mitigation Strategies:
  • Thorough credit underwriting and assessment of borrowers (using CIBIL scores, etc.).
  • Focus on salaried borrowers (67% of disbursements in FY24).
  • Monitoring and managing prepayment trends and potential slippages.
  • Effective recovery mechanisms, including actions under the SARFAESI Act.
  • Maintaining adequate provisions as per the Expected Credit Loss (ECL) model.
• Control Effectiveness: Moderate
• Potential Financial Impact: Increased provisioning, reduced profitability, and potential impact on capital adequacy.
• Quantitative Risk Metrics:
  • Gross NPA: Increased from H 173.85 Crore (0.55%) in FY23 to H 285.98 Crore (0.82%) in FY24.
  • Net NPA: Increased from H 82.95 Crore (0.26%) in FY23 to H 146.80 Crore (0.42%) in FY24.
  • Provision Coverage Ratio: Decreased from 52.29% in FY23 to 48.67% in FY24.

Liquidity Risk #

• Risk: Risk of not having sufficient funds to meet financial obligations.
• Severity: Medium
• Likelihood: Low
• Trend: Stable
• Mitigation Strategies:
  • Maintaining adequate on-book liquidity (investments for LCR and SLR).
  • Maintaining undrawn documented bank facilities.
  • Diversified funding mix (bank loans, NCDs, CPs, public deposits).
  • Asset Liability Management Committee (ALCO) to monitor mismatches.
• Control Effectiveness: High
• Potential Financial Impact: Inability to meet payment obligations, increased borrowing costs, and potential reputational damage.

Interest Rate Risk #

• Risk: Risk that changes in interest rates will negatively impact the Company’s net interest income (NII) and profitability.
• Severity: Medium
• Likelihood: Medium
• Trend: Stable
• Mitigation Strategies:
  • Maintaining a mix of fixed and floating-rate borrowings.
  • All loans are floating with annual repricing to mitigate yield risk.
  • ALCO monitors interest rate risk.
• Control Effectiveness: Moderate to High
• Potential Financial Impact: Reduced NII and profitability if interest rates move unfavorably.
• Quantitative Risk Metrics:
  • Net Interest Margin (NIM): Increased from 3.36% in FY23 to 3.63% in FY24.
  • Interest Spread: Increased from 2.31% in FY23 to 2.53% in FY24.
  • Average Yield on Assets is decreasing and average cost of borrowings is increasing.

Compliance/Regulatory Risks #

• Definition: Risks arising from non-compliance with laws, regulations, and guidelines issued by regulatory bodies like NHB, RBI, SEBI, and MCA.

Non-Compliance with NHB/RBI/SEBI Guidelines #

• Risk: Non-compliance can lead to penalties, restrictions, and reputational damage.

• Severity: High

• Likelihood: Low

• Trend: Stable

• Mitigation Strategies:

  • Robust internal control systems.
  • Regular internal audits.
  • Compliance monitoring by the Audit Committee and the Board.
  • Compliance with Ind AS, RBI Master Directions, and SEBI regulations.

• Control Effectiveness: High

• Potential Financial Impact: Penalties, fines, restrictions on business activities, and reputational damage.

• Quantitative Risk Metrics:

  • The company did not meet requirements to raise minimum 25% of their net long-term incremental borrowings in a financial year by way of long-term capital instruments.

Emerging Risks #

Climate Change and Green Financing #

• Risk: There is a need to adapt lending practices towards climate change issues.
• Severity: Medium
• Likelihood: Medium
• Trend: Increasing.
• Mitigation Strategies: The Company is exploring opportunities in green housing, and plans to finance solar rooftop project.
• Potential Financial Impact: Initial investment costs may be high, but can generate long-term revenue.

Technological Disruption (FinTech) #

• Risk: Rapid advancements in financial technology (FinTech) could disrupt traditional housing finance models.
• Severity: Medium
• Likelihood: Medium
• Trend: Increasing
• Mitigation Strategies:
  • Investing in IT infrastructure and digital capabilities.
  • Exploring partnerships with FinTech companies.
  • Automating loan processing and document verification.
• Control Effectiveness: Moderate
• Potential Financial Impact: Loss of market share to more technologically advanced competitors, increased costs for technology upgrades, and potential obsolescence of existing systems.

Change in Income Tax Laws and GST Rates #

• Risk: Change in income tax laws and GST rates
• Severity: Medium
• Likelihood: Low
• Trend: Stable.
• Mitigation Strategy: Constant monitoring of tax laws and regulations.
• Control Effectiveness: High.
• Potential Financial Impact: Could increase or decrease in overall tax burden and profits.

Strategic Analysis of Can Fin Homes Limited (2023-24) #

Long-Term Strategic Goals and Progress #

• Goal: Increase lending to new home aspirants, enhance stakeholder value, uphold ethics and good corporate governance, with a special focus on affordable housing for low and middle-income groups, aligning with the government’s “Housing for All” objective.
• Geographic Expansion: Strategically expanding its presence, focusing on deepening its reach in Southern India while exploring new centers in other parts of the country.
• Growth Target: The Company expects to grow at an average rate of 18% to 20% for the next five years.
• Asset Quality: Maintaining high asset quality and a healthy loan portfolio. Loan book growth target of about 11% and average loan size up to 27 lakhs
• Capital Adequacy: Infuse fresh capital to support growth and maintain comfortable Capital Adequacy Ratio (CAR) and Leverage Ratio.
• Progress: The company has seen an 11% growth in its loan book for FY 2023-24, and CAR is at 24.48% (well above the 15% regulatory requirement). They are expanding their branch network (14 new branches opened in FY24).

Competitive Advantages and Market Positioning #

• Credo: Friendship Finance, prioritizing customer service and quick loan approvals.
• Market Niche: Focuses on affordable housing loans for low and middle-income groups, a segment with high growth potential and aligned with government initiatives.
• Experience: Over 35 years of experience in the housing finance sector.
• Sponsor: Promoted by Canara Bank, a major public sector bank, providing stability and brand recognition.
• Asset Quality: Claims lower non-performing assets (NPAs) compared to competitors, driven by a focus on salaried individuals (though exposure to self-employed is increasing). However gross NPA has incresed to 0.82%
• Cost Management: Maintains a tight cost-to-income ratio (16-17%), contributing to profitability.
• Funding Mix: Judicious funding mix consisting of credit facilities from banks, National Housing Bank, public deposits, Commercial Papers (CPs) and Nonconvertible debentures.
• Diversified Loan Portfolio: Offers both housing and non-housing loans, reducing risk concentration.

Innovation Initiatives and R&D Effectiveness #

• Digital Transformation: Significant focus on digital technology adoption and IT infrastructure modernization. This includes automating loan processing, document verification, and enhancing customer experience.
• Core Banking Solution: In the process of implementing a new core banking solution to improve efficiency and revenue.
• Fintech Partnerships: Exploring partnerships with FinTech companies to enhance services and operations.
• R&D Spend: R&D spend for the year is Nil

Management’s Track Record in Execution #

• Financial Performance: Achieved profit growth, maintained a strong Capital Adequacy Ratio (24.48%), and a reasonable debt-to-equity ratio (7.34).
• Operational Efficiency: Demonstrated focus on cost control and digital transformation to improve efficiency.
• Risk Management: Shown prudence in managing risks, with specific attention to monitoring prepayments and potential slippages.
• Asset Quality Maintenance: Gross NPA% stands at 0.82%
• Expansion: 14 new branches were opened during the FY 24, taking the total number of branches to 219.

Capital Allocation Strategy #

• Tier 1 Capital Infusion: Plans to raise up to ₹1000 Crore through further issue of shares (Follow-on Issue, Rights Issue, Preferential Issue, QIP, or other modes) to support growth and maintain capital adequacy.
• Borrowing: Plans to issue Non-Convertible Debentures (NCDs) up to ₹4000 Crore. Aims to increase overall borrowing limit to ₹50,000 Crore.
• Dividend Policy: Consistent track record of dividend payments. The Board considers regulatory guidelines, growth plans, and capital requirements when recommending dividends.

Organizational Changes #

• Company Secretary: Nilesh Jain was appointed as company secretary on 27 Sept, 2023.
• Change in Auditors: The company has changed its statutory auditors.
• Re-appointment of Directors: Shri K. Satyanarayana Raju, and Shri Ajai Kumar have been proposed for re-appointment.

ESG Analysis of Can Fin Homes Limited #

Environmental Metrics and Targets #

Metrics: #

• Energy Consumption: Tracks energy consumption. FY24: 2,26,33,686 GJ from non-renewable sources.
• Waste Management: Segregates waste (dry, wet, sanitary) and partners with a certified e-waste handler. Waste generation quantities are stated as “minimal”. Proper waste disposal system exists.
• Water Usage: Tracks water withdrawal, consumption, and discharge. Water utilization is strictly confined to operational necessities.
• Green House Gas Emissions: Starting efforts to monitor and quantify all emissions. Detailed Scope 1, 2, and 3 emissions data is not comprehensively reported.
• Green Finance: Steps taken and proposed launch for green finance products, rooftop solar products.

Targets: #

• Reduction of Greenhouse Gas Emissions: “Thorough plan” in place, focusing on energy-efficient devices and monitoring consumption.
• Waste Management: Aiming to minimize waste sent to landfills through segregation and recycling partnerships.
• Green Housing Projects: Exploring opportunities for financing green housing.
• Digital Infrastructure Improvement: To optimize process.

Social Responsibility Programs #

CSR Focus Areas: #

Healthcare, education, livelihood generation, women’s empowerment, support for Anganwadis, vocational training, facilities for people with disabilities, orphanages, and nursing homes.

CSR Expenditure (FY23-24): #

₹13.91 crore spent on 170 projects, impacting 1,17,150 beneficiaries. Projects include ambulance donations, medical equipment provision, classroom construction, scholarships for girls, and support for renewable energy installations.

Employee Well-being: #

Focus on occupational health and safety, gender diversity, equity awareness campaigns, and preventive healthcare programs (e.g., health check-ups, “Can Fin Walkathon”).

Financial Inclusion: #

Targeting underprivileged sections with tailored financial solutions.

Diversity: #

Diversity ratio is 774:262. 1036 employees were trained.

Governance Structure and Effectiveness #

Board Structure: #

Experienced leaders from banking and finance, with a mix of Executive, Non-Executive Promoter, and Independent Directors.

Board Committees: #

Seven committees: Audit, Stakeholders Relationship, CSR, Nomination Remuneration & HR, Risk Management, Management, and IT Strategy. These committees have defined roles and responsibilities.

Risk Management: #

Structured Risk Management Framework and Committee are in place to identify, assess, and mitigate risks.

Ethics and Transparency: #

Emphasis on ethical governance, internal controls, and open communication with stakeholders.

Compliance: #

Regular audits and evaluations to ensure compliance with regulations and identify improvement areas.

Board Evaluation: #

Annual evaluation of the Board, its Committees, and individual directors.

Code of Conduct: #

Code of Conduct for Prevention of Insider Trading, and a Code of Conduct for Directors, Independent Directors and Senior Management Personnel.

Whistle Blower Policy: #

Company has put in place a whistle blower policy.

Related Party Transaction: #

All related party transactions are approved by the Audit Committee or Board or members at a general meeting as per applicability.

Sustainability Investments and ROI #

Investments: #

Investments in energy-saving devices, renewable energy (solar rooftop panels), and digital infrastructure improvements.

Green Financing: #

Company exploring green finance products.

Regulatory Compliance and Future Preparations #

Compliance: #

Compliance with regulations including:

• Companies Act, 2013
• SEBI Listing Regulations
• RBI Master Directions for Housing Finance Companies
• IRDAI regulations (for insurance agency business)
• Investor Education and Protection Fund Authority (IEPF) Rules
• Environmental laws (Water Act, Air Act, Environment Protection Act).

Future Readiness: #

Awareness of regulatory changes and implemented mechanisms to ensure compliance. Preparing for new regulations like the SEBI, and other applicable laws.

Digital Infrastructure: #

Investing in digital infrastructure.

Future Projections and Guidance #

Management Guidance and Assumptions #

• Growth: Management expects the Company to grow at an average rate of 18% to 20% for the next five years. Loan book grew by 11% for FY 2023-24 and is projected at approximately H 41,000 Crore outstanding as on March 31, 2025.
• Asset Quality: A continued focus on maintaining high asset quality is emphasized, with a strategy to lower exposure to Loan Against Property (LAP). Improved CIBIL scores support a strong, low-risk loan portfolio.
• Profitability: The company prioritzes maintaining comfortable levels of Capital Adequacy Ratio and Leverage Ratio.
• Liquidity: The company has maintained a higher on book liquidity in the form of investments of LCR and SLR purposes and off book liquidity in the form of undrawn documented bank limits.
• Digitalization: The company is committed to digital transformation to improve customer service, streamline internal processes, and expedite loan processing.
• Capital Adequacy: Capital adequacy ratio (CAR) at comfortable level above statuary requirement of 15% at 24.48% as of March 31,2024
• Average Loan Size Increase: The average loan ticket size increaseing from 22 lakhs to 25 lakhs in FY2024. By FY2025, the intent to take it higher, to 27 lakhs.

Market Growth Forecasts #

• Housing Finance Sector: The Indian housing finance sector is expected to grow, driven by rising disposable income, urbanization, and government initiatives like the Pradhan Mantri Awas Yojana (PMAY).
• Real Estate Sector: The real estate sector is projected to grow at a robust compound annual growth rate of 9.2% from 2023 to 2028.
• Fintech: The Indian FinTech market, valued at $50 billion in 2021, is projected to reach $150 billion by 2025.
• Construction Sector: A double-digit growth rate is predicted for the construction sector (10.7%).

Planned Strategic Initiatives #

• Geographic Expansion: Focus on expanding the branch network, particularly in Tier II cities, and deepening presence in existing markets, with a significant focus on geographic expansion.
• Product Mix: Prioritizing LAP and SENP in their strategic expansion, guaranteeing focused growth in the crucial domains.
• Digital Transformation: Ongoing investments in IT infrastructure to modernize operations, automate loan processing, enhance customer experience, and improve data security.
• Green Housing: Exploring opportunities to finance green housing projects, aligning with sustainable practices.
• Capital Raising: Tier-1 capital will be raised for an amount not exceeding H 1000 Crore (Rupees One Thousand Crore only) by way of one or more public and / or private offerings, inclusive of such premium.

Capital Expenditure Plans #

• Capital Raising: The document indicates a need to infuse Tier-I capital to support growth, maintain a comfortable Capital Adequacy Ratio (CAR), and provide a cushion for borrowing capacity. A proposal to raise up to ₹1000 crore through various means (follow-on public issue, rights issue, private placement, QIP, or preferential allotment) is presented.

Efficiency Improvement Targets #

• Continued investments in IT infrastructure to improve operational efficiency
• Cost Management: The company highlights its commitment to rigorous cost control, aiming to maintain a cost-to-income (CI) ratio of 16-17%.
• Process Optimization: Implementation of new processes (although causing temporary disbursement challenges) has strengthened portfolio quality monitoring and management.
• Technological Improvisation: Improve productivity and TurnAround Time (TAT) at the branches and the Central Processing Center.

Potential Challenges and Opportunities #

Challenges #

• Fund Availability: A primary challenge for all HFCs is securing long-term funding, especially given increased borrowing capacity.
• Risk of Default: Managing potential defaults, especially given the focus on the affordable housing segment, is a key concern.
• Interest Rate Volatility: The Company faces interest rate risk, although it mitigates this with a mix of fixed and floating-rate borrowings and lending.
• Competition: Intense competition exists, especially from banks and larger HFCs in Tier I and Tier II cities.
• Compliance: The Company needs to raise a minimum of 25% of their net long-term incremental borrowings through listed debt securities, as prescribed in the SEBI Circular.
• Fraud: the company faced issues of fraud by employees and customers in some branches.

Opportunities #

• Government Initiatives: Programs like PMAY and tax incentives create significant opportunities for growth in the affordable housing segment.
• Urbanization: Increasing urbanization and migration to cities drive demand for housing and related financing.
• Rising Incomes: Growth in disposable income, particularly in the middle-income segment, fuels the demand for better housing.
• Digitalization: Technology adoption allows for improved efficiency, customer experience, and risk assessment.
• Fintech Partnerships: Collaborations with fintech companies offer opportunities to enhance service offerings and streamline operations.
• Rental Housing: Growing demand for rental accommodations presents an opportunity to expand into rental and co-living spaces.

Scenario Analysis and Sensitivity to Key Assumptions #

• Growth Sensitivity: The 18-20% growth target over the next five years is ambitious. A sensitivity analysis should consider scenarios with lower growth rates (e.g., 10-15%) and higher growth rates (e.g., 25-30%) to assess the impact on capital needs and profitability. Factors like economic slowdown, increased competition, or regulatory changes could impact the actual growth rate.
• Interest Rate Risk Sensitivity: While the company uses a mix of fixed and floating-rate instruments, a significant and rapid increase in interest rates could negatively impact its Net Interest Margin (NIM). A sensitivity analysis should model the impact of various interest rate scenarios (e.g., +1%, +2%, -1%, -2%) on profitability.
• Asset Quality Sensitivity: The company highlights improved CIBIL scores and a focus on the salaried segment. However, a stress test should be performed to assess the impact of a deterioration in asset quality (e.g., increase in Gross NPA ratio by 1%, 2%, 3%) on provisions and profitability. The model should be re-assessed.
• Capital Raising Sensitivity: If the planned capital raising of H 1000 crore is delayed or unsuccessful, the company’s growth plans and ability to maintain regulatory capital ratios could be affected. A sensitivity analysis should consider scenarios with lower capital raised (e.g., H 500 crore, H 750 crore) or a delay in capital raising.
• Competition Sensitivity: The increase in competition may affect the growth and profitability of the company.
• Fraud Sensitivity: The fraud identified in the branches may affect availibility of funds.

Overall Assessment #

Can Fin Homes demonstrates a clear focus on growth, asset quality, and operational efficiency. The planned strategic initiatives are logical given the market environment. However, achieving the ambitious growth targets will be contingent on successfully raising capital, managing interest rate risk, and maintaining strong asset quality in a competitive market. The sensitivity analysis outlined above should be part of the Company’s ongoing risk management process.

Audit and Compliance Analysis #

Auditor’s Opinion and Qualifications #

The Joint Statutory Auditors (B. Srinivasa Rao & Co. and B. K. Ramadhyani & Co. LLP) issued an unqualified opinion. This signifies their belief that the financial statements accurately represent the Company’s financial position, performance, and cash flows, adhering to Indian Accounting Standards (Ind AS) and the Companies Act, 2013.

Qualifications/Reservations #

• The Secretarial audit report notes the need to update the location/situation of PPE.
• The Secretarial audit report also mentions fraud reported by the company with remedial actions being taken and a new core banking solution being implemented to avoid recurrence.

Key Audit Matters #

Two key audit matters were identified:

• Expected Credit Loss (ECL) Allowances: The auditors focused on the appropriateness of the models and assumptions used to calculate ECL, recognizing the inherent judgment involved.
• Information Technology (IT) Systems and Controls: Given the reliance on IT systems, the auditors assessed the design and operating effectiveness of automated controls and performed independent testing.

Key Accounting Policies and Changes #

Key Policies #

The document highlights several key accounting policies:

• Financial Instruments: Recognition, measurement, and classification (amortized cost, FVTOCI, FVTPL).
• Impairment of Financial Assets: Uses an Expected Credit Loss (ECL) model based on historical loss experience, probability of default, loss given default, and other factors.
• Employee Benefits: Defined contribution and defined benefit plans are accounted for, with actuarial valuations for gratuity and compensated absences.
• Revenue Recognition: Interest income is recognized using the Effective Interest Rate (EIR) method. Fees integral to EIR are recognized as interest income.
• Property, Plant, and Equipment: Measured at cost less accumulated depreciation and impairment. Depreciation is on the Written Down Value method.
• Leases: Recognizes right-of-use assets and lease liabilities for leases with terms over 12 months (unless the underlying asset is of low value).

Changes #

There were no material changes in accounting policies. The Method of reporting energy consumption was revised and is reported in Gigajoules instead of in INR.

Internal Control Effectiveness #

Auditor’s Opinion on Internal Financial Controls #

The auditors issued a separate report (Annexure B to their main report) stating that the Company has “an adequate internal financial controls system over financial reporting and such internal financial controls over financial reporting were operating effectively in all material respects as at March 31, 2024.”

Management’s Representation #

Management has represented that there are adequate systems and processes in the Company commensurate with the size and operations of the company to monitor and ensure compliance with applicable laws, rules, regulations and guidelines.

IT Controls #

While the overall system is deemed adequate, the auditors, in their report on Key Audit Matters, advised management to “upgrade its information technology infrastructure, including software, to improve information security, minimize areas where transactions are handled manually, and connect systems and procedures”.

Regulatory Compliance Status #

Generally Compliant #

The Company states compliance with:

• Master Direction - Non-Banking Financial Company - Housing Finance Company (Reserve Bank) Directions, 2021.
• Companies Act, 2013, and related rules.
• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
• Secretarial Standards.
• Insurance Regulatory and Development Authority of India (IRDAI) regulations.
• Other applicable laws and regulations.

Specific Compliance Notes #

• Compliance with Legal Entity Identifier (LEI) requirements.
• Registration on the TReDS platform.
• Adherance to RBI Directions and SEBI circulars.

Secretarial Audit #

The Secretarial Audit Report (Annexure 1) confirms compliance with applicable statutory provisions and good corporate practices, subject to observations included in a seperate letter.

Legal Proceedings and Their Potential Impact #

Pending Litigations #

The Company has disclosed pending litigations in Note 36 of the financial statements. These primarily relate to claims made by borrowers before consumer forums.

Management Assessment #

Management believes, based on internal and professional advice, that no material liabilities are expected from these cases.

Contingent Liabilities #

Contingent liabilities, including demands under appeal relating to GST.

Related Party Transactions #

Policy #

The Company has a Related Party Transactions Policy in place, in compliance with Regulation 23 of the SEBI Listing Regulations and Section 188 of the Companies Act, 2013.

Approval Process #

Related party transactions require prior approval from the Audit Committee, and “material” transactions require shareholder approval via special resolution (with related parties abstaining from voting).

Disclosures #

Details of related party transactions are provided in Note 44 of the financial statements, as per Accounting Standard 18 (AS 18) and Indian Accounting Standard 24 (Ind AS 24).

Key Related Parties #

Canara Bank (promoter), its subsidiaries, associates, and joint venture companies, and Key Managerial Personnel (KMP) and their relatives.

Material Transactions #

Material Related Party Transaction(s)/ Contract(s)/ Arrangement(s)/Agreement(s) are disclosed, including transactions with Canara Bank, Canbank Computer Services Limited, and Canara HSBC Life Insurance Company Limited.

Materiality Threshold #

A transaction is considered material if it exceeds INR 1,000 crore or 10% of the annual consolidated turnover, whichever is lower.

Subsequent Events #

No material changes and commitments affecting the financial position of the Company which have occurred after March 31, 2024 are mentioned.

Analysis of Accounting Quality #

• The unqualified audit opinion indicates a high level of accounting quality.
• The financial statements are prepared in accordance with Ind AS, indicating a commitment to high-quality, internationally comparable financial reporting.
• The use of estimates and judgments in areas like ECL, employee benefits, and provisions is standard practice. The auditors have specifically focused on ECL as a key audit matter, indicating close scrutiny.
• The detailed disclosures in the notes to the financial statements, particularly regarding financial instruments, related party transactions, and employee benefits, enhance transparency.
• Although the auditors did not express a qualified opinion, a separate note on IT systems and controls indicates some risk.

Regulatory Risk Assessment #

• The document demonstrates a strong emphasis on compliance with various regulations, indicating a proactive approach to regulatory risk management.
• As a Housing Finance Company, the Company is subject to close supervision by the National Housing Bank (NHB) and the Reserve Bank of India (RBI). This adds a layer of regulatory scrutiny.
• The report states there were no major instances of non-compliance reported.
• There was fraud reported, the quantum of fraud reported is significant(57.10 Cr). Remedial actions have been taken and provision has been made.
• IT systems and controls are deemed as a key audit matter and there is an approved Cyber Security and IT Policy.