Can Fin Homes is no longer a market darling, but are better days ahead?

Indian Express

07-05-2025

Can Fin Homes is regarded as one of the most respected housing finance companies (HFCs) in India. Its reputation stems from a simple reason: it avoided the mistakes that brought down several of its peers.
In the years leading up to 2018, many HFCs aggressively expanded into real estate developer financing — a strategy that backfired in the aftermath of the 2018 IL&FS crisis. A lack of funding exposed gaping issues in the developer financing segment, leading to the downfall of many companies, including DHFL, PNB Housing Finance, Edelweiss Housing Finance (now Nido Home Finance), and Indiabulls Housing Finance (now Samaan Capital).
During this period, Can Fin Homes continued to remain profitable. Its NPAs ratios were the best in class, not only during the 2018-19 crisis but also during the Covid lockdown. Yet, its price-to-book value has been continuously trending downwards despite a profit growth of 19.3% between FY19 and FY25.
Fig 1 (Source: http://www.screener.in)
The P/B ratio has steadily declined and is now below levels seen during the Covid-19 market crash. The stock has not performed well either.
Fig 2 (Source: http://www.tradingview.com)
Why is this happening?
Several structural shifts in the regulatory and competitive landscape post-2018 help explain the de-rating.
Regulatory change in favour of banks: Until 2019, HFCs were regulated by the National Housing Bank (NHB), which acted both as a regulator and a refinancer. This led to concerns over a conflict of interest. Regulatory norms under NHB were relatively light touch — capital adequacy norms were lower, liquidity requirements minimal, and asset-liability mismatches (ALM) weren't strictly monitored.
This allowed HFCs to grow rapidly, often by borrowing short-term and lending long-term. The IL&FS crisis changed everything. In response, the Finance Act of 2019 transferred the regulation of HFCs from NHB to RBI, aligning them with NBFCs under tighter scrutiny.
Post-2019, HFCs faced several new challenges:
Higher Capital Requirements: Equity capital as a percentage of loans was raised to 15% (from 12%), phased in by 2022.
Strict asset liability norms reduced the freedom to raise short-term funds for long-term loans.
Exposure Norms: Builder loans and LAP (Loan Against Property) came under tighter control.
Funding Costs: The RBI doesn't refinance HFCs like NHB did, removing the conflict of interest. Banks also enjoy cheaper, more stable funding versus HFCs.
The result was that HFCs have lost their funding edge, and banks, flush with deposits, are much better positioned to give home loans at lower rates.
Is asset quality also worsening?
Not significantly. Can Fin Homes' GNPA ratio as of FY24 stood at just 0.9%, the best among peers. However, a slight uptick since FY23, at a time when most peers have shown improvement, could be a cause for concern.
Fig 3 (Source: First Principles Investing, Annual Reports and Investor Presentations) Fig 4 (Source: Motilal Oswal Report on Can Fin Homes – Q4FY25 Update)
In addition to the above, one possible reason for a de-rating could be branch-level frauds detected over the last 2-3 years. A branch in Ambala reported a fraud of Rs 40 crore in FY23, and another branch in Bhilwara, Rajasthan, reported a fraud of Rs 3.5 crore.
Another incident involved a whistleblower complaint by an employee in October 2024 alleging recruitment fraud by a senior executive.
While isolated, a combination of all these factors has likely led to the de-rating in Can Fin Homes.
Is profitability a concern?
Profitability has not declined materially. However, while ROE remains high compared to listed HFC peers, it has trended downward compared to FY18.
Fig 5 : (Source: Can Fin Homes Ltd FY24 Annual Report)
Further investments in IT overhaul and branch expansion is likely to put pressure on margins in the near term until benefits of these investments begin to accrue.
Does Can Fin suffer from operational challenges?
Disbursement growth remains a key hurdle in expanding the loan book.
In FY24, total disbursements fell to Rs 8,177 crore, down from Rs 8,947 crore in FY23. In FY25, it is up by a meagre 4.8% at Rs 8,568 crore.
Fig 6: (Source: http://www.screener.in)
The reason for continued slowdown, especially in Q3FY25, was due to Karnataka's e-khata issue that stalled nearly Rs 400 crore worth of business. As a result, Q3 FY25 disbursements were flat year-on-year.
Impact of IT systems overhaul
Can Fin Homes is in the midst of an IT overhaul. This involves implementing a completely new Loan Origination System (LOS) and Loan Management System (LMS) package, along with other key operating functions.
Implementation is expected to take 9-12 months, and the project is expected to go live in Q3 FY26 (October-December 2025). However, near-term disruptions are likely.
The IT expenses have already increased by about Rs 3 crore per quarter since the March 2024 quarter. From FY27, annual operational costs are expected to rise by approximately Rs 25 crore per year. The initial capital expenditure is also significant, estimated potentially around Rs 60-75 crore, which will be amortised over 6-7 years.
Has Can Fin Homes' business model changed for the worse?
While salaried customers still account about 72-73% of the loan book, the company is tweaking its product mix. It's now strategically increasing exposure to self-employed segment (SENP), which accounts for 35-38% of incremental disbursements and its share in total loan mix has gone up from 25% in FY22 to nearly 30% in FY25.
The company is expanding Loan Against Property (LAP), opening it up to new customers, and is aiming to take LAP to around 7% of total mix.
These changes aim to protect margins and find newer avenues of growth. But this raises a fundamental question. Can it go down the risk curve, grow well and keep portfolio quality at similar levels compared to when it was primarily serving salaried employees only?
The consensus, assuming market valuations are a reflection of investor consensus, is that Can Fin Homes of 2025 is not the Can Fin Homes of the last decade.
Facts versus outcome
Investors such as 3P India fund 1 which have consistently raised stake in Can Fin Homes Ltd over the last few quarters have a contrarian view. Their actions suggest that it believes that factors such as disbursement slowdown, IT overhaul, product mix changes are either temporary problems or unlikely to materially change the competitiveness of canfin homes.
On an absolute basis, the P/B ratio is at a 10-year low.
Fig 7 (Source: http://www.screener.in)
On a relative basis, Can Fin Homes valuation is towards the lower end of the spectrum (Top 15 HFCs in India).
Does it deserve this valuation? Is the market factoring in too much negative? Or is the market factoring in a slow but continued decline in performance? Investors looking to either invest or reconsider their current holdings in the HFC space are faced with these questions. There are no easy answers, and how it plays out remains to be seen.
Note: We have relied on data from http://www.Screener.in and http://www.tijorifinance.com throughout this article. Only in cases where the data was not available have we used an alternate, but widely used and accepted source of information.
Rahul Rao has helped conduct financial literacy programmes for over 1,50,000 investors. He has also worked at an AIF, focusing on small and mid-cap opportunities.
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