Investor's Eye
[December 04, 2012] | | |
| Summary of Contents STOCK IDEA CanFin Homes
Recommendation: Buy
Price target: Rs220
Current market price: Rs134 Turning over a new leaf Key points -
Turning to growth path: For CanFin Homes (CanFin), a housing finance company sponsored by Canara Bank, the financial year 2012 marked a distinct change in strategy and financial performance. Notwithstanding its historical sluggish growth at 7.8% CAGR over FY2001-10, the company's sanctions and disbursements grew by 81.7% and 102.6% respectively in FY2012. The FY2012 performance is not a flash in the pan. The company's renewed focus on growth and the recent aggressive expansion of its branch network have put it on a high growth path for the next few years. CanFin has added 25 branches since March 2011 which amounts to an increase of close to 60% in its current branch network of 66 outlets. Consequently, we expect the company's disbursement to grow at about 60% CAGR resulting in a 38% CAGR in the loan book over FY2012-14. -
Favourable geographic presence; sustainable margins: In addition to its aggressive expansion, the company's favourable geographical presence augurs well. The volume offtake has improved significantly in the southern realty markets especially around Bangalore, where CanFin has a strong presence (16% of its branches in Bangalore and 65% in south India). The company's branches are strategically located (outside cities) and serve customers requiring relatively smaller loans (of below Rs10 lakh), which are eligible for interest subvention. Further, the company gets refinancing from the National Housing Board (NHB) at competitive rates due to lending in semi-urban rural areas (that account for about 40% of its loan book). Thus, we expect CanFin's net interest margin (NIM) to sustain at over 3% going ahead. -
Robust asset quality and comfortable capital position: Despite a weak macro-economic environment the asset quality of the company remains strong as its gross NPAs were a meagre 0.9% of the advances and its net NPAs were nil in FY2012. This is mainly possible due to stringent credit appraisals (customer referrals preferred) and efficient recoveries. The capital adequacy ratio as of Q2FY2013 is 15.44% (17.44% in FY2012) against the minimum requirement of 12%. According to the management, the current capital will suffice till FY2014. -
Valuation discount unjustified, improving return ratios could narrow valuation gap: Even as the other bank-sponsored housing finance companies are either posting losses or merging with their banks, CanFin continues to show a strong performance. However, its stock trades at a modest valuation of 0.6x FY2014E book value, which is a 40-50% discount to its nearest peer, GIC Housing Finance, which trades at 1.1x FY2014E book value. Going ahead, due to a pick-up in disbursement and increase in leverage the return on equity (RoE) is likely to move up to 16.5% by FY2014 from about 13.3% in FY2012. This should improve the valuations. We believe the operational performance and return ratios of CanFin are improving which should lead to a re-rating of the stock. We value the company at 1x FY2014E book value and initiate coverage on it with a Buy recommendation and price target of Rs220.
SECTOR UPDATE Cement Correction in cement price across country Key points -
Cement price declined across all regions by Rs10-15/bag: We have recently done a channel check with the cement dealers to take the recent updates on the cement price across the country. According to our channel check, the price of cement in the past ten-day period declined by an average Rs10-15/bag (cement bags weighing 50 kg) across the country. Among the regions, the correction in the cement price was highest in the northern and central regions, where the price corrected in the range of Rs15-20/bag due to a weak demand environment and an increase in the supply. On the other hand, the correction in the cement price was relatively less in the western and eastern regions, where the price corrected in the range of Rs10-12/bag. The southern region witnessed a stable price on a month-on-month basis despite a poor demand environment. With the recent correction in the cement price, the all-India cement price dropped to Rs295/bag as against Rs308/bag at the end of Q2FY2013. The cement dealers are of the view that the price could decline further by around Rs5/bag if the cement offtake does not recover. -
Recent price correction to have a partial impact on realisation in the coming quarter on a sequential basis: As the correction in the price is higher in the northern and central regions, the realisation of companies like Shree Cement, JK Lakshmi Cement, JK Cement, Birla Corp, Heidelberg and Mangalam Cement could witness pressure on a sequential basis due to their higher exposure to these regions. On the other hand, companies operating in the southern region like India Cements, Madras Cements, Dalmia Cement, Chettinad cement and Kesoram Cement could post a stable realisation in the coming quarter on a sequential basis. For pan-India cement players like ACC, Ambuja Cements and UltraTech Cement, the impact on the realisation in Q3FY2013 could be Rs8-10/bag on a sequential basis. -
Average realisation for FY2013 to remain higher (marginally) over FY2012: The recent correction in the cement price could affect realisation in the coming quarter on a sequential basis. However, for FY2013, the average blended realisation of cement companies is expected to be higher (marginally) over average blended realisation of FY2012 on account of a sharp price rise implemented in the Q1FY2013. On an average, we expect the cement realisation for FY2013 to be higher by 2-5% over FY2012. -
Cement offtake not witnessing post-monsoon recovery: According to our channel check, the cement demand that usually picks up after monsoon has still not witnessed an improvement in the demand environment. Among the various regions, the demand environment is relatively better in the western and northern regions, whereas the southern region continues to witness a sluggish demand environment. -
Cost of production to remain high: On the cost of production front, power & fuel and freight cost are the two key cost elements in the overall cost structure of the cement industry. On the power & fuel front, the cost of imported coal corrected in the last quarter and hovers in the range of $83-85/tonne, which is lower on a quarter-on-quarter and year-on-year bases. However, on account of depreciation in the rupee, an increase in the price of domestic coal (increased by 30%) and a revision in the tariff by state electricity boards are likely to offset the benefit of correction in the coal price. On the other hand, to deliver higher volume, the lead distance of the companies increased, which resulted in an increase in the freight cost for the companies. Hence, the cost of production is expected to be higher going ahead. Outlook
The recent correction in the cement price could affect realisation in the coming quarter on a sequential basis. However, for FY2013, we expect it to remain higher (marginally) over FY2012. Further, with the anticipation of an improvement in the execution of infrastructure projects, we expect the cement companies to post a double-digit growth in their revenues. However, failure to adhere to the supply control could be a key risk to the cement price. In addition to this key risk, concern remains in terms of cost pressure as follows: a) an adverse movement in the coal price; b) an increase in the power tariff; and c) an increase in the freight cost due to increase in fuel price and lead distance. Hence, we maintain our neutral stand on the sector. However, selectively we are positive. Our top pick in the sector is UltraTech Cement in the large-size space on account of its strong balance sheet and attractive valuation compared with other pan-India players like ACC and Ambuja Cements. In the mid-size space, we continue to prefer Orient Paper & Industries due to its attractive valuation and value unlocking through de-merger of its cement division.
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| | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | | | |
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