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Tuesday 19 September 2006

Can Fin Homes Ltd.

Company Details: Kotak Research
Company Website: http://www.canfinhomes.com

The Home Dream

Actually this company came in our notice while trying to look for lowest home loan rates. No this company does not offer the lowest home loan rates. Rather, we believe it offers much more than that.

For starters the interest rates are rising as far as the current scenario is concerned. Though the interest rates may again start declining from next week or sometime in future or continue to rise for some time in the future. These are scenarios on which we have not based this investment as we are not sure of the time period till when the rates will go up or go down. But rates going up will definitely mean higher income for the company but at the same time it will lead to lesser revenue growth as more customers will wait for lower interest rates before taking on a fresh loan and vice versa. This is one of those rare combinations of negative and positive feedback loops in action.

The company's main source of revenue is the spread between the interest rates paid on the loans which it takes from various banking and non-banking companies and the rates it receives from its customers. Interest rates going up can lead to another scenario where property prices are going down and people waiting to buy in such a case rush in and this leads to more loans been given out.

As far as the current scenario of the company, it is a Canara Bank promoted company dealing in Home loans. The company has shown a decent profit over the last 5 years. The profit has been in a range from 17 crores to 26 crores but mainly it has been around that 20 crores mark. If you consider this in relation to the Market Cap of the company which is currently 104 crores (share price @ Rs 50.50) the profits looks to be around 20% return on capital. Just exploring a further, the company has been paying a dividend of 2.5 Rs for the last 5 years. A book value of Rs 84 also provides an opportunity to buy a company trading at around 0.64 of the book value.

Though the kind of capital we employ in a single stock right now is not very large but we do not diversify much. This does not mean we invest all our proceeds in a single stock but we still keep a substantial portion of our portfolio in one stock. The maximum we have ever placed in one stock is 50% of our total portfolio. We will follow the same principle for this one too and hope that the share price goes down rather than going up as we can buy more of it around month end or beginning of a new month. (we get our salaries then). A quote from WEB shall make things clear ...

The most common cause of low prices is pessimism - sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.

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1 comment:

h# said...

Interesting find !! But just being a devil's advocate here, the debt on the company is huge with a LT Debt/Equity ratio at around whopping 9.something.. Now you might argue that for financials that earn money purely from interest arbitrage debt on balance sheet is common and that is precisely my point. Interest rate increase will only hurt companies involved in such business as not only the lending rate but the borrowing rate also goes up. And they might not be able to pass on the entire hike to the customers just to maintain growth thereby squizing margins. The other thing to look at is NPAs which is not a big concern at under 1% for this company but for others such as IFCI its a big issue!! I will still consider it cheap though but in the high interest regime i would stay clear of such stocks.