I would be a little cautious at these levels - V Vaidynathan built ICICI’s retail franchise and is extremely good but as aditya puri said, lending is a two edged snake - if you chase it too hard, it will come back and bite you at the back with fury.
The type of customers capital first has are quite risky and it’s not easy to make money off them in the long run - examples abound in indian market - citifinancial, associates financial,barclays retail banking, GE credit cards all of them shuttered/got sold at rock bottom valuation
Thanks Varadharajan for your skeptical wisdom which is helping to learn a lot. Please let us know the financial metrics which we can can measure the performance and tag a NBFC as good or gimmick. Latest investor presentation is showing a good improvements on NIM, CAR, and Gross & Net NPA levels.
I’ve been invested in capital first from 180 levels and am pleased with the stock price - what’s very important to note is that improvements in NIM, CAR and NPA always happen during good times when the book grows (enlargening the denominator(.
What matters is how they stack up during tough times - say 2009 or in late 2012. Unfortunately, the company does have a long enough history.
All I am saying is that if you look at ICICI’s retail book, it has always lagged HDFC’s quality even though in 2001-2004, ICICI was growing better and had comparable metrices. When the unwinding happened, HDFC surged ahead.
I am sure VV has become wiser too - all I am saying is that there are tail risks in NBFC’s that one has to be cognizant of you - unlike say FMCG companies.
For the record, I worked in Citi financial - which had a $ 200 MM profit and a ROA of 3% and a RoE of 21 % in 2004 that became a - $ 200 MM loss in 2007 - it was in the same segment that capital first is in right now.
“Invest with optimism but monitor with skepticism” is my mantra.
@Vradharajan, I agree with your views, esp since you have that Citi back ground
I will be useful if you can share what went wrong for Citi Financials, WAs it reckless growth, i.e growth at any cost. ICICI Bank also did the same in 2006-08 and paid the price.
Thats why I liked the stricter NBFC new regulation by RBI, esp on NPA norms similar to banks. But management can always create such chaos, if they are chasing wrong things.
It is also imp to have a very clear cut " When to Sell" Criteria.
I think Cap First s a deep cyclical stock, Very high growth ( mostly due to low base effect), Turnaoround in progress as well, high quality mgmnt ( hope Vaidi has learnt from the reckless lending at ICICI Bank).
I will be exitig this after may be 2-3 rate cuts by RBI which is 2 yrs ahead I think ( extended cuts). I also feel with such high growth rate (>55% NII growth) with 0.01 % NPA is very rare and with compounding, stock can reach tripple digit in next 2-3 yrs. BV growing 30 %, P/B around 3, Estimate Bv in Fy17 is 355 as per my estimates.
Disc : Invested with higher allocation, views biased !
Citi financial and GE money lent at 30 % + IRR to risky customers - but the important thing to understand that in a downturn, these customers are badly hit and no IRR/no NIM can protect you if the guy cannot pay back capital in the first place.
Without a fully functioning credit bureau, we are still not a great market structurally for unsecured lending. As simple as that - it’s risk that you have to recognize.
You are missing the point about NPA - high growth on a small base will always have a low NPA - it’s only after 2-3 years that the customer’s actual credit quality plays out.
We have to remember that any NBFC is a levered play - 7: 1 or so. So, few loans going bad wipes out 7 x the capital.
Again, my only concern is that NPA is not yet tested and it can only get worse with the passage of time on such a high growth base in this segment.
I am invested and I hope the story plays out but expecting NPA’s to remain at 0.01% and a 30 % growth rate over 3-4 years to continue is the equivalent of a batsman scoring 100s in every match and remaining not out forever - highly unlikely.
NBFC inthe past have created huge wealthe.g Sundaram Finance, Bajaj capital, M&M Finance etc. I know its a highly leveraged play. One need to be aware that it s a high risk high growth play, Thats why I said its imp to know when to SELL. As per my estimates, one can easily hold for next 2-3 yrs. Economy is still down in dumps, credit growth has not picked up, rate cut is still far away. So it needs to be seen as deep cyclical, at least better than PSU banks. The growth rate is phenomenal.
As they say “one should not overstay the welcome”"
I think this simply cannot be compared to something like sundaram finance which has never diluted and has an roe of 23 % over 3 decades !
Sundaram finance is like a toyota corolla while capital first is like a skoda octavia - rapid growth but potential fat tail probems exist and one has to be cognizant of that.
Sure, I also think it will go up like crazy in such a bull market but I would sell this at the first sign of trouble. If there is one thing I have learnt, it is that anything about 25-30% /in lending always, always comes back and bites you at the back in a down market.
I mostly agree with your thought process. MSME lending by default is v risky and v high growth can further increase the risk. Sunder finance is the place, CAPF would aspire to be after 2/3 yrs, when RoE improves to 17/18 % as per their vision/mission.
But oppportunity size is huge, If they have some loan approval system ( which they claim and have v low NPA 0.1% for last5 yrs, despite v tough markets, NPA in systembeing at all time high levels) simliar to gruh/repco, which help them sustain low NPA, market may reward them differently ( only time will tell).
IMHOCAPF isat a stage where SCUF was 3 yrs back.
Also, the cycle has even not turned for positive, one need to be careful when it turns negative after peaking - 2/3 yrs down the line
25-30 % growth by HDFC Bank for several years was achieved with low NPAs provided you have right system and processes, not like city financials etc. But I do agree 30 % loan growth in MSME is risky.
But I do consider it as a cyclical play and will do really well in interest rate cutting cycle. It can be seen as a highly leveraged trade ( high risk/high return, similar to psu banks etc.) where probability of success is relatively higher.
It is also a stock which needs market support to do well. I mean in bull markets, can do really well !
Disc : invested, views are biased, Std Sebi disclosures alsoapply !
It seems I am the only guys holding this stock, as nobody else is posting anything, Anyways this is a very high conviction bet for me now.
CAP First has come up with another stellar Q, NII growth of 60 %, fee income growth of 55 %, AUM 30%, Sales 38 %, NPA 0.01 %. They are growing 10 % QoQ. 300 Cr QIP in Q4 expected, which will further boost BV
You can watch Vaidya interv on ET Now, search on youtube, he is saying there could be 50 -60 % PAT growth in fy16, could end at 170 Cr PAT. Its a classic case of huge operating leverage, as Opex is rising @20 % only and income rising 60 %.
They are like SCUF 4 yrs back and Bajaj Finance 6 yrs ago. MSME & Retail/ 2 wheeler/consumer goods financing is a proven business for many NBFC, They have to do a reasonable job ( not taking undue risk for excessive growth) to create wealth over next 3-4 yrs time. RoE & RoA will improve in FY16/17 to 18% and 2 %.
It can be a good 30 % compounder in reducing rate cycle
I also agree - only this business has significant tail risks - in retail, one makes money when one collects and I was a retail banker for 4-5 years and I do know that loans given at the beginning of the bull run are tough to collect at the end of a bear cycle.
And this was summarized by aditya puri in a beautiful quote " banking is like petting a dog. If you get too aggressive with it, it will come back and bite you in the back".
I am invested still but would not think of adding at these levels. 20x FY 16 for a business like this is very high and leaves no margin for error.
of course, all of what I say will not come true until the cycle turns- so the stock could run
I think it is very poorly written article and does not provide any depth to the topic. It merely says that LAP is bad because
The equity (which is the property) prices keeps going up which is a credit risk
The borrowers are taking loans against property at a higher rate because they are in financial distress.
People take LAP for various reasons and cannot be narrowed down to financial distress. The is similar to saying self-employed people taking loans at higher rates than salaried people or MSME taking working capital loans at higher rates than larger corporates is because of financial distress.
The example cited of Maharashtra company folding up due to fraud is not enough to support the theory because fraud in financial services companies is not new and so management quality, integrity, discipline and risk management are key factors to gauge a bank/NBFC.
I do agree that lending against ever increasing house prices is a risk, so it is very important for financial companies to have ever more emphasis on credit assessment and risk management.
Thanks @rajpanda for this article.
My take on Cap first is not for LAP story, my bet is mostly because of following factors
Growing at a very fast pace, Last yr management guided for 100 % PAT growth and beat that, in FY 16 they have guided for 70 % PAT growth
More than adequately capitalised CAR of 24 %, recent QIP of 300 Cr with big names
I am betting big on Management , both Vaidya , Board and promoter Warbus.
The kind of secular story/work Warbus P has done with Kotak Mahindra Bank or Bharti Airtel, I am expecting similar stuff in next few years
Co is till small compared to other NBFC, with low base effect I am expecting super normal growth for next 3 years, If you check on screener with similar loan book and NII, it is at a stage where SCUF or M& M fin etc were there few years back, Their m cap is 12000 cr + now. I think CF can easily reach these levels in next 2/3 yrs.
With take over of new Mgmnt, GNPA and N NPA are continuous falling despite higher loan book.
During the int rate falling cycle NBFC will do well, cost of fund dec, NIM inc etc
To me it is deep cyclical bet, with high risk/high return bet, better than PSU bank stocks which many people like. but this has reasonable surety and earnings to back it quarter after quarter.
They have also acquired housing finance licence from NHB, last year, which is another steady growth driver
CEO has very high personal stake in shareholding ( close to 14 %, as per last AR, if I am not wrong)
I do agree they are in risky business/ MSME/LAP, but I am betting on prudent management sth like Gruh etc has done. So far so good and the Management has not disappointed.
Let us how it plays out in next 2/3 years, opportunity size is huge, hope management doesn’t waste this opportunity
Includes additional provisioning of Rs. 86 Mn on a one-time basis due to change in the provisioning policy for Mortgage Loans. The Company has made a more stringent provisioning policy from Q1-FY16 where 100% provisioning is provided at 360 DPD compared to 720 DPD earlier.
Sub 10% RoE for the past 3 years, and also in H1 FY 16. Higher provisioning norms has diluted the effect of higher operating leverage. Operating Income / Average Assets however has risen significantly - would this be due to higher growth of consumer durable financing?
