Capital First Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Finance

Company

Capital First Ltd

Reco Price
Rs. 250
Price Target (12 Months)
Rs. 450
Upside
80.00%

Date

18 July 2014
Sensex
25641.56
CNX Nifty
7663.9

Exchange

Code

NSE
CAPF
BSE
532938

Strong business model and increasing penetration will help to deliver strong growth in next two years.

Strong Company:
Capital First Ltd (CFL) is the leading non banking finance company providing finance to retail and wholesale business .In retail financing it offers consumer durable loans , two wheeler loans , loan against property , mortgage , gold loans and small business loans while in wholesale business it provides loans majorily to real estate developers.CFL hs total AUM of Rs 9700 crores with distribution network of 164 branches and 1089 employees spread across 40 cities.

Strong AUM Growth:
Company’s AUM has been steadily growing at 79% CAGR which was primarily driven by lower base.CFL has been gradually moving to Retail which constituted only 10% in FY 2010 has now already reached to 80% in FY 2010.Retail segment constitutes mainly consumer durable loans, two wheelers loans, Loan against property, Hence this is expected to grow at 25% CAGR in next 4 years.

Margin to remain stable:
Net Interest Margin of CFL has remained stable at 4.5-4.7% in last 2 years. With stable borrowing profile and company’s increasing presence in high yielding segments (i.e. two wheeler, gold, consumer durable loans), margins are likely to improve marginally going forward. Currently CFL enjoys the IIR (internal rate of return) of 27% in Consumer Durable whereas it enjoys 24% of yield in two wheeler which constitutes 8.4% of the total AUM, 18% of yield in Gold Loans (6% of the AUM) and 13% of yield in LAP. Further Average Ticket Size (ATS) in Consumer durables is Rs 28000, two wheelers is Rs 35000/-, Gold loans is Rs 120000/- while in LAP it is higher at Rs 10 crores.

Asset quality maintained:
CFL was successful in maintaining its asset quality with lowest Gross and Net NPAs in the industry at 0.5% and 0.1% respectively. This is based on the fact that asset mix has shifted towards comparatively safer segments like LAP, Mortgage, two wheelers and Consumer Durables than riskier segments of developer loans. We drive more comfort from stringent provisioning norms of CFL where in it starts providing once the assets cross 90 days overdue which is ahead of regulatory requirement of 180 days. While retail segment is low LTV and ATS business which remains least affected from downturn in the economy, we don’t expect any significant deterioration in asset quality and expect it to remain stable.

Returns profile to improve significantly:
ROE of CFL is lower because of the fact that company has changed its accounting policy of amortizing processing fees over the tenure of the loan as against earlier. Policy of booking the said fees at upfront. Another reason is company’s conscious decision of higher provisioning than the regulatory requirements and recent capital infusion. It is expected that provisioning expense (credit cost) is likely to remain stable going forward. This along with improving efficiency in terms of lower cost to income (expense) ratio is likely to help strong bottom line growth of 98% (due to low base of FY14) over FY14-16E.

Alert Management:
CFL’s management has delivered the promises of changing the business strategy which has yielded positive results despite struggling environment for financial services industry. Business mix has completely moved towards safer segments in retail after the new management has taken the charge in FY10 along with significant improvement in credit rating. Further CFL’s strategy of 1) moving out of non profitable business like securities and commodity broking, 2) focus on core business of SME financing and 3) best in class asset quality with higher provisioning than regulatory requirement drives more comfort. Hence company is well positioned to deliver the consistent growth of over 25% in next 2-3 years given its strong business model and increasing penetration.

Stock Data

CMP (Rs)
246.5
Face value (Rs)
10
52 Week Range (Rs)
253.85 - 111
Market cap (Rs Crores)
2364.4
Price To Book Value (x)
1.86
P/E Ratio (x)
34.30
EV/EBIDTA (x)
12.03

One Year indexed Stock Performance

Capital First LtdSensex
Capital First Ltd
Performance (%)
1m
6m
12m
Absolute
20.00
85.73
71.01
Sensex
1.57
21.73
27.39

Shareholders

(in %)
30-Jun
Promoter
71.83
FII
2.02
DII
6.9
Others
19.25
Total
100

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Industry

According to the rating agency ICRA, NBFCs are expected to report a growth of around 8-10% in retail credit in FY14 compared to the 19% achieved in FY13. This was based on the observation that credit by the sector had grown by only 5% during the first nine months of FY14, as against the 15% posted during the same period of FY13. The CV and CE sectors were impacted by the dip in economic growth, the government’s inability to kick start projects and judicial interventions like the ban on mining. The demand for gold loans too has been subdued due to regulatory interventions such lower LTV ratios which prevailed for a large part of the fiscal year.

The RBI mandated that all mortgages from March 31, 2011 were to be registered with the Central Registry under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The SARFAESI Act, which allows banks and financial institutions to auction residential and commercial properties when borrowers fail to repay their loans, will enables banks to reduce their non-performing assets (NPAs) by adopting measures for recovery or reconstruction.

Profile

Capital First Limited provides financial services across consumer and wholesale businesses in India. The company offers retail, MSME, consumer, and wholesale credit. It provides gold loans, loan against property, durable loans, and two-wheeler loans, as well as wholesale credit and wholesale debt syndication for corporates; and auto, health, home, personal accident, travel, and life insurance. The company was formerly known as Future Capital Holdings Limited and changed its name to Capital First Limited in November 2012. Capital First Limited was incorporated in 2005 and is based in Mumbai, India.

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar-12
Mar-13
Mar-14
Mar-15E
Mar-16E
Income:-
  • Net Sales
  • Growth (%)
  • Total Expenditure
  • EBITDA
  • EBITDA margin (%)
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • Profit Before Taxation & Exceptional Items
  • Provision for Tax
  • Profit After Tax
  • PAT Margin (%)
  • Adjusted EPS
  • 740.15
  • -
  • 188.97
  • 551.18
  • 74.47
  • 3.60
  • 554.78
  • 397.70
  • 5.49
  • 151.59
  • -
  • 151.59
  • 45.76
  • 105.83
  • 16.41
  • 800.29
  • 8.13
  • 260.87
  • 539.43
  • 67.40
  • 8.34
  • 547.77
  • 483.28
  • 6.12
  • 58.37
  • 21.31
  • 79.68
  • 9.91
  • 69.77
  • 10.37
  • 1053.01
  • 31.58
  • 345.19
  • 707.81
  • 67.22
  • 9.51
  • 717.32
  • 646.68
  • 5.89
  • 64.75
  • -
  • 64.75
  • 5.80
  • 58.95
  • 7.19
  • 1395.80
  • 32.55
  • 458.68
  • 937.12
  • 67.14
  • 10.50
  • 947.62
  • 825.50
  • 6.05
  • 116.07
  • -
  • 116.07
  • 11.607
  • 104.46
  • 12.74
  • 1850.41
  • 32.57
  • 605.14
  • 1245.27
  • 67.30
  • 11.70
  • 1256.97
  • 1065.00
  • 5.95
  • 186.02
  • -
  • 186.02
  • 18.602
  • 167.42
  • 20.41
Source: Stockaxis Research, Company Data

Valuation

CFL’s strategy of 1) moving out of non profitable business like securities and commodity broking, 2) focus on core business of SME financing and 3) best in class asset quality with higher provisioning than regulatory requirement drives more comfort. We believe company is well positioned to deliver the consistent growth of over 25% in next 2-3 years given its strong business model and increasing penetration.

We recommend Buy rating on stock with target price of Rs 450 where stock trades at reasonable multiple of 22x to FY 2016E.

 

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