This part will mainly cover 2015-2017
Let us assume today is 30th July 2015 and it has been one year since our analysis of Can Fin Homes.
There has been 40% growth in the Loan Book and however the ROA has fallen. The reason for fall in ROA seems mainly because of equity capital raising done by the company, which gives the company enough capital till 2017. This is further indicated by a fall in leverage.
Both Number of Branches and the Average Business per branch seems to be pointing in the right direction as expected before.
Another factor worked in the favour of the company is the fall in 10 year yield from 8.8% to 8% and fall in repo rate from 8% to 7.25%.
In the management commentary, Can Fin Homes management seems to be pointing towards having more commercial loans in the Book. Generally, commercial loans are considered risky and have different characteristics. This needs to be monitored in future to really see what is happening.
While the Book value of the company grew by almost 71% (Includes adjustment done due to capital raised last year), the Share price almost doubled resulting in Price to Book expanding from 2.15 to 2.76. The fall in 10 year yield also contributed to this rise.
We will do nothing as we are still not sure regarding the quality of the company. We would love to know what you may have done?
Let us assume today is 30th July, 2016. We review the results of Can Fin Homes.
There has been 30% growth in the Loan Book and the ROA of the company has also slightly improved. As the effect of equity capital raised last year is waning the company has reached back to the previous Leverage levels.
While the number of branches have almost reached to our expectations made two years ago, Only Average business per branch needs to be tracked.
Repo Rates have fallen from 7.25 last year to 6.50% this year further boosting loan growth of the industry. (10 year yield fallen by 50 bps)
As mentioned already last year, the company seems to be moving into more risky assets by expanding the non-housing loan book. This is already 20% of the total Loan Book. As per general knowledge, the loan book may have become risky. However, this we will only come to know in time.
The price of the company has increased by 50% while the book value has increased by 50% thereby resulting in multiple expansion from 2.76 to 3.64. A part of this multiple increase is due to falling interest rates.
At this point of time, we will do nothing, however, one thing is very likely that the risk profile of the company seems to have been downgraded. We would love to know what you may have done and why?
Let us assume today is 30th July, 2017 and we plan to review Can Fin Homes.
The loan book of the company grew by 30% and ROA increased slightly. Lets focus on the ROA first, the faster growth in Net interest income (Interest-expenses) contributed to the same.
Growth of the loan book is amazing. The number of branches and the average business per branch have approximately reached the levels we estimated earlier in 2014. Further, growth of the company needs to be evaluated like a new company.
The Repo rates have fallen from 6.25% last year to 6.00% this year further contributing to the growth of the company. (10 year yield by 50 bps)
There has been a change in the management of the company only after 5 years. This is a big change and it needs to be monitored. As all the analysis was done with the basis of new management in 2014.
While the Loan book has grown by 23%, the share price has trebled, resulting in price to book growth from 3 to around 8 times.
At this point of time, we may do nothing or sell some shares. As the riskiness of the model has increased while the share price too has multiplied manifold. However, you may have a different opinion and we would love to know why you think so?
The purpose of these case studies is to practice such cases and help all of us develop patterns to take similar decisions in future and avoid mistakes of both omission/comission. Its like practice before the main match. We may have made some mistakes or you may not agree with us. However, we would love to know why you think so or what you may have done differently? So that we may all learn together.
Before Going further it would be better if you Analyse the case or do the valuation or allocation according to your own Method. That way it may help you to do better with the case further and sharpen your mind for future.
Pick Parts of the case study and use it as it may be helpful to you.
May we all learn and progress together.
If you would like to see the next phase (2018- Inflection point) please proceed to part 3 by clicking on “3” on the bottom of the page