Wonderful article on Capital First’s beginning journey in V Vaidyanathan’s own words. Old article though loved reading it!
Great article, good write up, thanks for sharing
Sharing links for the other two parts
Both are great reads. I realise investing in a NBFC is all about investing in their Management and here we are investing in V Vaidyanathan and reading all three article further builds my conviction in the Man.
Thank you these links and that enabled me to understand company history well.
Here is another great link I found (story told in a youtube video from CNBC)
Disc: Invested and Increased my allocation recently as I think CAPF may be bottoming out.
If there is any bank run, RBI protects banks. Is there any such body for NBFC’s protection for any such event ? Though the probability is less for any such event due to asset liability mismatch. But nevertheless the risk exists.
Mohnish Pabrai lost $65 million when one of his investment in HFC went bankrupt due to one such event in 2008 in-spite of company being prudent in financing borrowers
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!!
Merger rumors with IDFC Bank! Not sure if this is true and if it is, not sure of it will be good for CAPF holders.
Why promotors holding continuously decreasing? In Dec 17 it is 35.58. IDFC merger will be bad for Capital First
So it is official now, 139:10 share swap ratio
Merger was announced at swap ratio of 139:10. Current prices works out to Rs 940 per capital first share. I find this to be highly negative. If I wanted a bank I would rather buy RBL or Yes Bank rather than IDFC Bank. Profit degrew and the return on equity is just 7 percent for IDFC Bank.GNPA is also very high. Whereas Capital First is growing at more than 30% with excellent asset quality. Lucky I sold on Friday.
Isn’t it good for CapF shareholders?
You get 139*67.5 = 9,382 worth of IDFCBANK stock if you happened to have purchased just 7000 worth of CapF a mere week ago. Or even yesterday, at around ₹822.
Would Price of CapF jump to ₹938, or would IDFCB fall to ₹59 as per swap ratio?
Please correct me if I’m wrong.
Yeah thats correct. I believe Capital first share price to jump upto 940 rather than IDFC bank shares to fall. Its definitely positive for IDFC bank so dont see any reason for their share price to drop.
For long term, I believe its negative for Capital First as they are merging with a weak bank having a legacy Infrastructure corporate portfolio with low CASA ratio. The only positive is V Vaidyanathan to lead the merged Bank. Believe thats a big positive. If V Vaidyanathan would have stepped down, It would have been quite negative.
A very adverse ratio in my understanding for idfc bank shareholders. Capf shares were trading @650 some 8-10 days back and suddenly the merger pushes it to 940 odd levels. Looks like a desperate attempt by the bank to merge with a credible partner.
I think its very positive for IDFC bank. They get such a strong retail book with low NPAs at 3 times book. Its a great franchisee. A great management comes along too. With regards to jump. in share price of CAPF from sub 700 levels, I would say the shares were depressed and fair value should be upwards of 1000. So for IDFC Bank its a great buy.
the positive for capital first ,its cost of borrowing will reduce ,for capital first shareholders it will be positive because of swap ratio -capital first should rise on monday once market opens
It isn’t like IDFC Bank becomes the new promoter of Capital First and as a result it’s borriwing costs decreases. Capital first ceases to exist and replaced by IDFC Bank. While there could be a short term run up due to price differential, the long term potential of capital first has been replaced by this damp squib called IDFC Bank and that remains the fact.
Susindar its IDFC bank not Idbi bank.
In my opinion this is win-win situation for Capital First. The finance companies are now in a boom because the PSU Banks are slow in financing. Wiith the strengthening of PSU Banks and with mushrooming of a lot of finance companies they will not be able to show the previous growth. Moreover Capital First is not a very old company. The NPAs take sometime to come up with ever greening of loan which is a common practice among finance companies. They dont have a banking license and they are getting one. Mr Vaidyanathan will be the MD& CEO of the Bank which carries a lot of weight than his present position. The employees will be working in a Bank and so on. They are also getting a good swap ration. What else Capital First can have. About IDFC Bank it"s a new bank with legacy NPAs. Overnight it can not grow and become a big bank. Remember Kotak and ICICI Bank, also HDFC has acquired many banks and finance Companies to grow like this. I think its Ok for IDFC Bank, but the swap ration is not in its favour. Tomorrow the market may react for IDFC bank in the beginning but since it will be a big bank the stock will regain its price.