Whalesbook
Strong Quarter, Lingering Valuation Concerns for Can Fin Homes
Can Fin Homes has announced impressive financial results for its fourth quarter and the full fiscal year 2026, showcasing strong operations and effective loan management. While headline profit figures show a positive trend, the market is closely examining the company's valuation. Analyst sentiment is notably split, and industry challenges require a deeper look beyond just the strong earnings.
The Valuation Puzzle
Can Fin Homes (CANF) concluded fiscal year 2026 with a fourth-quarter profit after tax (PAT) of about INR 3.5 billion, a significant 48% year-on-year rise. For the full year, PAT grew 27% to INR 10.9 billion. Net interest income also rose 21% year-on-year to INR 4.2 billion in Q4. However, this financial strength is met with a cautious market valuation. The stock currently trades at a price-to-book (P/B) ratio of roughly 1.8 times its expected FY27 earnings, with target prices suggesting a 1.7 times FY28E P/BV. This premium valuation contrasts sharply with Motilal Oswal's reiterated 'Neutral' rating and a target of INR 1,000. This differs greatly from other analysts who collectively rate CANFINHOME a 'Strong Buy,' with price targets as high as INR 1,155, indicating different market expectations and risk views. Its P/E ratio of 11.2-12.4x is below the peer average of 18.3x, which might suggest it's undervalued on that measure. However, this doesn't fully address concerns from other valuation indicators and analyst disagreements.
Operational Performance and Efficiency
The company's operational performance remains robust. Profit before provisions (PPoP) grew 20% year-on-year in Q4 FY26 to INR 3.5 billion, and 17% for the full year to INR 13.4 billion. Management expects stable net interest margins (NIMs) around 3.75% for FY27, with spreads around 2.75-2.8%. Despite this, operating expenses increased by about 24% year-on-year in Q4, keeping the cost-to-income ratio around 19.8%. Management indicated the cost-to-income ratio is expected to remain elevated in FY27, projected between 19-19.5%, due to ongoing IT project spending, suggesting potential near-term pressure on efficiency.
The loan book expanded by 10% year-on-year to INR 42,209 crore, supported by a 23% increase in disbursements. However, high prepayments slowed overall asset growth.
Underlying Risks to Consider
Several factors suggest a cautious approach. Can Fin Homes' promoter, Canara Bank, holds a substantial minority stake of approximately 30% as of March 2026. This stake may affect strategic decisions. The company relies significantly on bank borrowings, which make up about 62% of its funding, creating sensitivity to changes in debt markets. While asset quality remains stable, with gross NPAs at 0.85% and net NPAs at 0.37%, there was a slight increase in Stage 2 and Stage 3 assets in the first half of FY26, hinting at potential stress areas in a growing portfolio.
Can Fin Homes' strategic shift towards non-housing loans, which now make up 28% of its book, could boost yields but introduces a different risk profile compared to its core housing finance business. High prepayments also continue to affect the growth trajectory of its assets under management (AUM).
Sector Outlook and Future Prospects
The Indian housing finance sector is expected to grow steadily, with estimates suggesting a Compound Annual Growth Rate (CAGR) of 4.9% to 7% over the next decade. Key drivers are urbanization, favorable demographics, and government housing plans like PMAY, especially for affordable housing. The sector faces pressure from changing interest rates and evolving regulations.
Projections for FY28 suggest a return on assets (RoA) of about 2.3% and return on equity (RoE) of roughly 17%. Continued success depends on managing competition and funding costs effectively. Competitors like HDFC, LIC Housing Finance, and PNB Housing Finance are also active in this market.