High level Notes from recent “Midcap Conference” by Moti Oswal and my concerns:
Management alluded that there could be 400-500bps improvement in RoE over three years from FY17 levels (12%) leading it to 17%+. This will rerate the stock as they implement the same…
As per management, three key factors will drive this improvement:
(1) Improving RoE in the CD financing business
(2) Mix shift toward CD and 2W financing segments, which generate higher RoE than LAP
(3) Break-even in profitability in the new ventures (affordable housing and used auto financing) over the next 1-2 years.
Over the past 5-7 years, CAFL has demonstrated its capabilities in incubating and scaling up new businesses from scratch, even in a highly competitive environment. Growth has always been steady in the 20-30% range, with a CAGR of 26%.
To continue the high growth they need to continue lending pace and focus NIM and quality which is where they struggle compared to Bajaj Finance etc.
I am also worried about their high level of Amortization of the Loan Origination Cost (LOC)….
As per Financial statements:
Loan origination costs such as credit verification, agreement stamping, direct selling agents commission and valuation charges are recognised as an expense over the contractual tenor of the loan agreements. Full month’s amortization is done in the month in which loans are disbursed. For the agreements foreclosed or transferred through assignment, the unamortised portion of the loan acquisition costs is recognised as a charge to the Statement of Profit and Loss at the time of such foreclosure/transfer through the assignment.
With the passage of time, I believe that LOC and Net Write off as a percentage of revenue will come down as they gain more experience over time and it will start reflecting in the bottom line with higher margins and expansion in the PE and EPS….
What I love about the company is young and dynamic “incentivized” (ESOP) management!!