Capital First Ltd

(shanid) #21

Book value estimation may not work as frequent equity dilution is the need of NBFC businesses.I think the key is not valuation but Corporate governance standards and how they are going to scale up are the two things which we need to monitor in coming quarters.**

(Hitesh Patel) #22

I havent looked at capf in details but used to read sharekhan reports earlier.

Till now they were in process of cleaning their books and now it seems things are getting in order.

The two positives for it are the promoter background and the top guy who was with icici.

I think it is definitely worth digging deeper and/or keeping on radar.

(saurabh shankar) #23


Actually on verge of being blasphemous i would say that management capability of the ex-icici banker is the biggest doubt. If you look at his record he while creating a mammoth asset book at ICICI had no control on quality of asset. This was evident when cycle turned.

A few checks from ex-ICICI bankers during that time will give more insights into his working style.

the bet for me is that they have learnt from their past mistakes and will be more prudent this time.



PS- not invested.


Totally agree with you Saurabh. Doing a little bit of scuttlebutt in banking industry and talking to the experienced VP folks I have got a similar impression.

(Punit) #25

Dear All

I spent a considerable amount of time to dig deeper into the company financials and business. I’m not going to make any statement of recommendation and leave it up to you to make that call. Here are my key observations


1). Company is planning to grow AUM from 96b to 290b in 5 years. The breakdown of AUM growth as per IR â âThe business aspiration is to have around Rs. 29,000 - Rs. 30,000 Cr AUM by FY19. Mortgage SME Loans â Rs. 21,500 Cr, Gold Loans â 1600 Cr, Consumer Durable Loans â Rs. 1200 Cr, TW Loans â Rs. 1500 Cr, Wholesale â Rs. 3500 Cr. These are approximate figuresâ

2). PAT - Current PAT/AUM is around 54bps. If we expect that ratio to grow (simple Iinear expansion of 10bps every year) overtime based on the AUM mix, then we can expect PAT of around INR3b in 5 years at a CAGR of 37%. This is without factoring in higher provision rate because of asset quality detrioration.

3). BVPS - If we expect dividend payout at the current level of 30%, then we can expect BV to be INR212 in 5 years. This is without factoring in any equity dilution which is bound to happen. Currently just the shares reserved under ESOS stands at 5% of the current shares outstanding.

4). Other Income â I havent been able to bifurcate clearly some of the other income such as one-time dividend income from a subsidiary engaged in private equity (which has now been folded) and commission/brokerage income from two subsidiaries that are now closed.

Management and business expansion

1). Cannot comment on the management as Iâve not had any interaction or have had any chance to get feedback from sources. I would avoid believing that the management is great just because they come from interesting background and companies.

2). NPA â Naturally the NPA is quite low but it would be difficult for the company to sustain at those levels going forward. I tried to get a breakdown of NPA for each business category but the company would not provide that. I think the company is bit aggressive in provisioning which is negative.

3). Company has been cleaning up its books and closing down unrelated businesses. Company has just received the license for home financing from NHB which can be an interesting area of growth. Response from IR on the growth strategy in home financing division â âSo far we are evolving our strategy on the business through HFC and I will not be able to share the data for the time being. We have commence operation by booking some of the balance transfer cases for the existing customers to build a book of around Rs. 100 Cr.â

4). Company does not plan to expand the number of branches but expand business from existing branches which should result in higher operational profit and margins.

Accounting :

**1). **They have changed accounting policy in 2012-13, which led to lower provisions and higher profitability. From AR of 2012-13 â __

a. In 2012-13 accounting policy was changed which reduced provisions for Gold loans by INR185m and increased provisions of durables by INR13m. IR response â âEarlier for the Gold Loan business, we had provisioning starting from 90 dpd and write-off at 180 dpd. Considering the nature of Gold Loans where the customer is paying bullet principal repayments, monthly interest payments and tenure of 1 year, it was decided to start provisioning from 180 dpd and write-off at 360 dpd.â__

b. In 2012-13 accounting policy was changed to amortize fee income on wholesale loan and ancillary borrowing cost over the tenure of the loan, resulting in increased profit of INR60m. IR response â âWholesale Loans are chunky in nature with average ticket size of Rs. 80-100 Cr with an average tenure of 3 years. Considering the lower focus on the wholesale lending side the no. of cases booked under Wholesale loans vary quarter on quarter. The fee income which is also quite chunky considering the ticket size, earlier was being booked upfront. For this there could have huge variation in quarter on quarter financial performance. To have a much better transparency in assessing the Q-o-Q financial performance and future projections, the management decided to amortize it over the period of the loans. The same logic applies for the borrowing side as that portion is also quite chunky to affect q-o-q performance variation if accounted upfrontâ__

c. In 2012-13 accounting policy was changed in the method of deferral of recognition of income as per the RBI guideline. So assignment income was lower by INR129m__

Capital Structure

1). Stock dilution â Iâm not sure the reason for equity dilution earlier this year. Companies should not dilute equity unless they are confident to generate high rate of returns on the new capital. People on the forum have been appreciating the high CAR but that was clearly at the expense of shareholders. Response from IR â âCapital First has grown its AUM by 29% in FY14 and we plan to carry the momentum of growth. At the same point of time, we wanted to be comfortable with our capital adequacy ratio so that it does not become a hindering factor in our growth. India had its election during May 2014 and in March the economic condition was not very stable. Considering the uncertain situation and the capital need for the future growth, CFL decided to raise the capital in March 2014â.__

2). Shareholding pattern â Almost 91% equity is held by handful of people/entities which is a concern when it comes to liquidity and minority shareholders protection.__

3). Company enjoys high credit ratings and so are able borrow money at around 10.5% which results in NIM of around 5.5%. I tried to get a sense of breakdown of NIM for each business category. Response from IR â âIâm providing the overall yield range product wise which would provide a sense of NIMs for all the products. Mortgage â 13%, Gold Loans â 18%, Consumer Durable Loans â 25-27%, Two Wheeler Loans â 24-25%, Wholesale Lending â 17-18%â__

Iâm just listing key points of my research but if you have specific questions feel free to ask.

(Vivek G.) #26


Taking management for the face value, we can extrapolate as follows:

AUM in 2019 : 25000 cr

RoA in 2019 : 2.50%

PAT arrived at from above figures is 625 cr.

Current shares o/s are 7cr.

Shares Required to maintain CAR for AUM of 25000 are 8.5-9 Cr.

Estimated EPS 69 aprox.

Applying a PE of 15(This is not conservative) the price should be : 1040 aprox.

If somehow management turns out to be all right(No clue on this), then 21% growth in AUM and 2.5% RoA are not figures which are not possible.

Applying RoA of 2% and PE of 12 gives price estimate of Rs 665 aprox, still a return of 21% CAGR in 5 years(Not upto valuepickr std but not extremely poor either.)

From the BLOG(You know Who), I got the impression that the CMD Mr. V Vaidyanathan was some kind of a star/respected person in Finance Industry. As I have no Highly placed friends in Banking/Finance industry I would rely on fellow boarders information and continue to increase allocation only if results unfold as expected.

My down side is protected by Strong Promoters, Capable/Experienced Management(??), Reasonable Projections, Low NPA due to LAP & L2V Ratio.

Disc: Have a mediocre position. This is not a invitation/recommendation to invest in CAPF. The idea is to know what fellow boarders think about the management capabilities and to know if my assumptions are going out of realms of probability.

Views/Flak invited for my over simplistic assessment.


(Aveek Mitra) #27

@ Punit… Thanks for the updates. I think IR was fair in answering the questions. My overall take from my own analysis so far…

  1. Rs. 6400 Cr. MSME loan at 50% LTV, actuarial tenor of 4 - 5 years and backed by residential and commercial property of almost 4200 Cr (refer page 130 of AR 2013-14) on book seems not aggressive.

  2. Rs. 452 Cr of two Wheeler; Rs. 575 Cr of Gold (LTV 75%), Rs. 360 Cr. of Consumer Durable Loan.

  3. Rs. 1796 Cr. of wholesale residential development loan with receivable escrow and 3 - 5 times asset backing may be bit riskier, lumpy and cyclical. But since the company is gradually shifting its focus from this segment and overall improvement in real estate sector may hopefully tide the company over from any inherent risk. What I mean is odds of negative surprise from the segment is lower than a normal predictable outcome.

  4. CAR of 22+% with 16%+ Tier 1 capital funded by equity to me is positive. It leaves further headroom from creating Perpetual Debt kind of instrument at opportune moment to further enhance the tier 1 capital.

  5. Positive mismatch in all maturity bucket, as claimed by AR, and maintained in 2013 -14, if followed during scale up phase will help the company tide over unpredictable events inherent in credit.

  6. I think provisioning norms as presented in 2012 - 2013 AR seems fine but I am not sure if it fully reflects in provisioning of only Rs. 114 Cr. against outstanding Loan Asset of Rs. 7000 Cr. (AR 14).

  7. Payment of commission to directors as mentioned by Punit is a non material event (Rs. 60 L) … This is just for clarification on the question raised.

  8. @ Punit … it would be good to know your calculation of Rs. 212 BV in five years i.e. in 2019 … How did you arrive at the figure? It would be good if you can share.

  9. I personally didn’t find anything wrong or gimmicks in changing the accounting practices as most of these have a possibility to err on the safer side. The possibility of “Accounting gymnastics” as I mentioned in my previous post is always there but till now I didn’t find any.

  10. There is hardly any contingent liability or Off balance sheet item disclosed in AR … We need to assume there is none of material nature.

I would request others to comment and contradict my above observations…

I feel it is a good way to reduce our mutual research times and come to quality conclusions.

Disc.: Not invested but actively researching on…

(Santosh Sinha) #28

Hi Vivek,

My 2 cents

I CAPF can achieve RoA and RoE targets by 2019, it will be a great achievement, then PE will be actually much higher, as Market may reward it for consistency and history unlike today. so PE of 20 ( like sundaram financeetc)will lead to 1400 price

2nd it will be more useful to find out/estimate BV, as these NMFC are value on p/b.

Taking one step as a time if q4 rate is continued in fy15, pat will be say 170-180 crore, what will be BV in ur analysis, my little knowledge and calculations showed it close to 244 after analysis BS given in 2014 AR, so the real money will be made in FY15 only, after that it will be earnings lead growth of 20-25 %

Other views r mostwelcome !

(Aveek Mitra) #29

Presently perpetual debt is Rs. 140 Cr. … Missed to mention that.

(Punit) #30

Vivek - On what basis did you arrive at 2.5% RoA? Currently they are earning about 0.54% on AUM. Even the best banks like HDFC bank are earning about 2% RoA, so i think it is overly optimistic to assume that CAPF can achieve that high RoA. My realistic expectation hovers around 1%. Second the current Ouststanding shares is 8.26 cr with additional 0.46 cr reserved for ESOS. Your expectations of 170-180cr in fy15 is extremely unrealistic in my humble opinion.

Aveek - for BV calculation, i assume linear increase in RoA of 10bps to achieve at PAT of INR3bn on AUM of 295b. Assuming 30% dividend payout ratio and current BV of 137, i arrive at BVPS of 212 in FY19. Naturally BVPS will be higher if they forego dividends.

btw, IndiaNivesh has just recommended a buy on Capital First with a target of 257, valuing it at 1.5x of 2016E ABV.

(Vivek G.) #31


Thanks for correcting me, Actually I picked the figure from MC without realising that it was still using 2013 DATA. My fault.

The 25000 cr AUM and RoA of 2.5% are managements stated goals. These are given on the last page of latest corporate presentation.

With cost of funds at 10.50% and LAP at 13%, I thought 2.5% RoA would be possible as expenses are normally supposed to met from Other Income (which could range around 1% of AUM). Also LAP is the least remunerative in the loan portfolio.

Yes 20% more O/s shares does alter the calculation.


(saurabh shankar) #32


I think rather than getting swayed by numbers of management it might be a good idea to do an inversion here. Assuming average ticket of 50 lacs and approval ratio of 30% how many SME’s will company need to touch base with to achieve its growth targets.

That should give us an insight into diligence done by management on these projections.



(Aveek Mitra) #33

This GOI report may give idea to anyone interested about size of MSME etc…

(Santosh Sinha) #34

It seems from the first cut analysis it is not a screaming buy, may be we will wait for q1 to see how it goes from there.

Also the lesser interest/comments by Sr VP guys gives a message in itself

(ricky76) #35

A PE firm coupled with an aggressive banker being compensated on growth is in my view a long term recipe for disaster in the lending business.

You want a Wells Fargo type CEO not a Countrywide Financial type.

This Vaidya guy though is a shrewd dude, he knows that an up cycle will wash away all sins and the market will reward aggressive growth no matter how.

The NBFC game is like a negatively skewed trade. Steady growth seems a given till one bad cycle wipes out everything.

(Aveek Mitra) #36

@ Punit… After some more reading / talking, it seems you are a bit uncharitable about the management’s ability to ramp up the ROA and PBT …

I don’t want to venture into any projection but I guess they have done a remarkable turnaround and repositioning and would ride the cycle of uptrending economy with at least 50 bps advantage on cost of funds. This year PBT of Rs. 75 Cr. shows better profitability compared to last year with jump in good jump in revenue. They are on a ramp up stage … Lots of cost heads would get benefit of scale.

I think Q1 result would throw some more light. I hope, the learning of Mr. Vaidyanathan from the disaster of ICICI in 2008 - 2009 would be helpful this time round!!

It is an opportunistic bet (if at all) as dilution may remain a thorny issue…

(Excel Monkey) #37

Why are you guys assuming that Vaidyanathan would not have learnt anything from the previous boom bust cycle?

Once bitten twice shy

Disclosure: initiated a small position in the name a few days back

(Raj Panda) #38

I have just the reverse question - Why should anyone assume that Mr. V has learnt from his “past mistakes”. Is there any thing on record that “he himself” considers his past action as mistake ? any interview, any note in AR, anything ?

What if, it is it’s just the opposite, that he is very much proud of his past actions and wants to repeat them and prove it now with CF, that it was a great model ?

In fact i see many media reports hailing him as a hero. It’s only in the quiet corners of vp and some other corporate chat corners, that i hear people murmuring, his actions weren’t great for ICICI. In this scenario, why should we assume that Mr. V considers his past action as harmful for his past institution and is on the way to mend them ?

If we were in his shoes, would we be considering our past action as wrongful ?


Agree with Raj. Looking at the aggressive expansion that he talks about I think it is a case of habit rather than change.

(Excel Monkey) #40

Well both arguments are subjective he might not have learnt his lesson or hecould be prudent this time

I was just objecting as no one giving him any benefit of doubt

Even I am not sure as reflected in my small position

But considering a tough task master like Warburg involved, overall I think risk reward is favourable

Why are you guys assuming that Vaidyanathan would not have learnt anything from the previous boom bust cycle?

Once bitten twice shy

Disclosure: initiated a small position in the name a few days back