Capital First Ltd

Stock Opportunities
1

The stock looks interesting, would like to know the views from fellow members.

72% held by Warburg Pincus

20% Held by FIs and Corp Bodies

Free Float less than 10%

After taking over from Biyanis, there seems lot of clean up happened over time.

Now that the books are clean, one can expect steady growth numbers going forward.

Technically stock should consolidate between 200 and 215 for some time, before giving a break out. Target could be higher.

Disc : Added small quantity near 210 level. Waiting to add more after getting views from fellow investors.

Thanks

Amit Anam

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2

Aman,

Please try and add more info on the business. Am sure, there are others more interested to learn about it.

3

Dear Raj,

PFA presentation link :http://www.4shared.com/office/tU4YXDbuce/CapitalFirstLimited.html

TEchnically the stock facing still resistance near 222, crossing which the stock will cross its recent 52 week high of 228 and touch 242/250 level

4

Hi

This is my first post as valuepickr. I used to work earlier with an NBFC called citifinancial and have been through two cycles in this space. The guy V. Vaidyanathan has quite a sterling reputation in banking as a hard ccore sales man and someone who takes prudent risks - he built ICICI’s home loan business with the teaser rates and quit when chanda kochchar was chosen over him.

Given the warburg backing, the large market space available, it is not inconceivable for the business to become a Rs. 150-200 Cr. PAT in 3-4 years’ time. The board composition too is excellent

This to me looks similar to how SCUF was 4-5 years back - of course competition is much tighter now and this would mean a RoE of say 17-19% rather than 20-21% that SCUF does.

That said, for the next 2-3 years, this does look a 2-3 bagger. Planning to initiate a position

:http://www.4shared.com/office/tU4YXDbuce/CapitalFirstLimited.html Link: http://www.4shared.com/office/tU4YXDbuce/CapitalFirstLimited.html

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5

So are you guys suggesting this stock only on the basis of its shareholding pattern?

6

Hi,

There are lots of analysis, discussion and recommendation happening on Capital First. One which I came across is here -http://value-picks.blogspot.in/2014/07/capital-first-ltd-must-buy.html.

Please have the reading, review and take a own call for taking position.

Disclosure: Started taking a small position from today.

-Muthu

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7

MD V. Vaidyanathan on CNBC TV18 (24th june) -

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1). CAR of 24%

2). Last Quarter PAT of 44Cr. Vs FY14 Yearly PAT of 37 Cr VsFY13March quarter PAT of 15 cr.

3). Favorable shareholding pattern.

4). Proven management.

5). Low NPAs

Only thing when I watched the above video - they think the PAT will double in FY15. that looks to be a very modest target to me. The PAT target should have been 3 times the PAT achieved in FY14.

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9

Hi,

luks really promising & turnaround story. I have just started researching, looks a long term story like muthoot & SCUF

What is interesting to find out is what went right in q4 fy 14, so such a great performance. if co does fy 15 even @ q4 fy14 pat, fy15 pat will be 3 x fy 14, this cud lead to serious re rating of stock.

q1 no. will be out on 18th, so let c

npa are also v v low of 0.08 %, management quality is superb, one can bank upon, so so is promoter.

disc: have started bying in small and will wait for 1 no. for story to get confirmed

Read AR of fy14, EBIDTA and PBT, NII story is intact, they changed some accounting norms in fy13, which lead to lower PAT

affordable housing will also start from q1 fy15

cheers !

10

It looks interesting … Just a few additional points and observations which need review …

  1. Promoters granted 65 L options to CMD at Rs. 207 a piece, which would be exercised in 4 equal tranches starting April 2015. At the time of the grant, it was made at about 45% premium to prevailing market price.

  2. The scorching pace of growth keeping such low Gross and Net NPA is commendable but if it can be maintained at a higher scale of operation is a moot question.

  3. The tax liability would be substantially higher next year as the offset they enjoyed for bad debt of 2010-11 would no longer be there.

  4. Similarly, the reported profit would be much higher due to absence of the loss in value they booked for discontinued operations.

  5. Unlike Magma Fincorp (which has very similar background and profile and valuation), CAPF’s NPA is substantially better possibly because of their staying away from LCV and other CV financing. Magma has AUM of Rs. 19K vis-a-vis Rs. 9.6K of CAPF with but former has a lower ROA.

  6. Their access to wide range of funds and very competitive rate and spreads, can possibly able to meet the management guidance of growing the loan book to Rs. 25K crores by 2019. It is a growth below 25% CAGR but profit growth may be substantially better.

  7. Warburg Pincus background may be helpful but in this regard it may be interesting to study if KKR, IFC, Chrys Capital etc have made any significant contribution to Magma and if yes, in what way?

  8. In spite of stellar track record of the management team, the possibility of making “financial gymnastics” to report scorching growth can’t be entirely ruled out as too much of stock option is given for showing high level of performance (appx. 7.3% of diluted capital). Sometime, too much of consistency of good performance itself is a suspect for me in a fiendishly complicated world of finance and banking.

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11

There are a few things which I would like to understand from the people tracking this story:

a) What are the moats?

b) How is it different from what banks are doing? Banks will always have access to cheaper money compared to an NBFC.

c) Why would a customer approach ‘Capital First’ and not a bank for getting loan against property? In my opinion the reasons a customer would take a LAP from Capital First are

  1. It provides cheaper loans when compared to banks. This could only be possible if the company operates at a very high operational efficiency (since interest costs are higher when compared to banks). I would be interested if a comparative analysis across NBFC’s is done in terms of aum/employee, disbursements/employee and average operation cost of each branch.

  2. It provides bigger loans when compared to banks. This is possible only if the risk that the company bears is higher than what a bank does. From annual report LAP are given at around 50% haircut which looked very high in my opinion. In the case of a bad economy where asset disposal itself is tricky I do not see a sufficient margin of safety.

d) Management seems extremely bullish and less guarded in my opinion. I would like a more cautious management specifically when you are giving out money.

e) What kind of loan does the company offer? Is it senior or sub-ordinate? Incase of default it is generally the senior debt that a company has taken from bank which takes precedence.

Discl. Not invested. I am ready to change my view incase I have more data and answers to my questions.

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12

Here are few points from my side on first look. Would like to get some clarification if someone can help.

1). From overall AUM - Wholesale Credit consist - 19% Vs Retail Credit - 81% ( total AUM 96.79 Rupee bn) - page 10 of FY14AR

2). SME Loans forms the bulk of AUM - close to 61.85 bn out of 96.79 (page 11 of FY14AR).

Q.1 Can someone clarify, if SME financing is also considered as part of retail credit ?

3). No. of live customers in FY12 vs FY14 is 83,544 vs 5,73,506 , which is net addition of roughly 5 lac customer in past 2 years, or >5x of what were live in FY12. (page 12)

4). While the number of customer jumped >5x during last 2 years AUM increased only by 0.5x from 61.85 bn to 96.79 bn.

5). In last 2 years SME loans have gone up from being ~44% AUM to ~60% of AUM (roughly from 27.50 bn to 61.85 bn). Mgmt. focus is clearly on MSME financing.

Q.2 Somehow these numbers don’t add up for me, while the bulk of AUM is in MSME financing, what is making the number of customer go up so rapidly and disproportionately to AUM growth ?

-The Company primarilyextends Mortgage Loans to its MSME customers.

Q.3 Should we be considering these mortgage loans (LAP) for MSME at par with mortgage loans for individual borrowers for dwelling units ? Mortgage loans for salaried individuals are mostly done on basis of Form16 (to gauge future earning ability) of individuals and attach lesser importance to property value. While LAP’s to MSME will have to be more accurate about the property (or plant & machinary) valuation and also future cash flow estimation of the company. That’s not so easy and requires lot of back end work. Also, in any case, what kind of property will a MSME be holding ? industrial sheds ? How easy it will be to liquidate such property in case of a default ?

Q.4 IMHO, the NPA numbers available for the business are for a very short period of time to draw any conclusions about the robustness of the model. True NPA numbers and robustness of model will have to be proved over a longer period of time. Remember this is lending business, return of money is equally important or more important than return on money. So what makes us so optimistic in so short period ?

Q.4 if the answer to Q.3 is mgmt and holding structure. Some industry people believe, having a veryaggressiveperson heading a lending business is not necessarily a good thing.

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13

@Anant,

From my understanding of the business, a good percentage of it is working capital financing for MSME and taking some property (plant,machinary,land) as mortgage for it. This sector has unmet needs as banks are sometime unwilling and sometimes haven’t reached those customers yet. That’s basically why, we have so many NBFC’s doing well in their own niche spaces and it may well continue for few more decades ? A customer will approach (or get approached) a lender who is willing to disburse with least inconvenience to him. After all, he has to dedicate his energy to run his own business. A few percentage points extra in interest rate may not bother him much as the other alternatives are even dangerous (like private money lender, no access to capital, running around a bank branch who is ill equipped to understand the nature of his cash flows etc).

Also note that , these LAP by MSME are not very long term in nature, it’s more to bridge the gap in cash flow and sometime may be some capital expenditure. At the end of the day if business does and cash flow improves, he might want to pay off the loan sooner than contracted.

It doesn’t answer all your questions, nevertheless an attempt from my side to see if my understanding of things help.

Disc: Moved to negative list, won’t invest unless my understanding of things change.

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14

a good read on the informal economy mostly comprising MSME http://www.thehindu.com/opinion/letters/informal-economy/article6214341.ece

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15

and the article referenced inside the above article to not be missed, so posting it here again

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16

I am trying to answer few macro questions raised…

  1. Moat: IMHO, no company starts a business with a large Moat … They can have an aim, a direction towards what types of Moat they are looking for and if strategy and operation are correct, Moat gets developed over the year and gets deeper and wider with scale, attracting quality talent, operational finetuning and huge negotiation power. Not every Moat is same. For a NBFC, a Moat can be one or many among the following… i) deep knowledge of a specific geography and / or specific domains of MSME operation like textile, handicrafts, crop market, light machining and many other similar things; ii) access to wide variety of customer origination points and a very entrenched relationship with banks, mutual funds, consumer durable, two wheeler makers iii) extremely efficient and fast credit appraisal and “red flag” mechanism; etc…

  2. Banks can have cheaper access to capital but not cheaper access to customer. In US, consumer credit is mostly NBFC based. And banks credit appraisal mechanism is very asset heavy compared to NBFC which is more cash flow heavy. In Indian context, biggest part of population / Micro enterprise is not creditworthy for a bank for lack of formal income documents and its assured predictability … An NBFC can profitably help this segment to come out from the clutches of “money sharks”.

  3. The historical default rate of small customers are substantially better than that of large borrowers. Wilful default is rare and concentrated in some geographic locations as per my interaction with NBFC, Cooperative Banks and general bankers. I am told, 180 days of loan classification gives enough headroom to NBFC to recover forced defaulters. And since ticket size and tenure is small, liquidation event in MSME is low but comparatively higher in LCV / CV segment.

Coming to Capital First … I am just at preliminary stage of review. Their application to disbursal ratio is 30%; LTV ranges between 60% - 65% and spread is 6%. None of these shows a very aggressive level of exposure.

Its correct that GPA / NPA develops over time and with size of the loan book… so reading too much in low NPA would be premature.

Real test of good NBFC starts when it scales up… Magma Fincorp faltered while scaling up. In India we have many stories of how companies went belly up while trying to scale mindlessly.

And yes, as I mentioned in my earlier post too that a very aggressive management is negative for NBFC in my opinion.

Lastly, I don’t allocate more than 10% of portfolio in NBFC as a sector. If one is running a small portfolio or just beginning to invest on his own, I would advise to shun the sector altogether. There are many simple, understandable, scalable and compounding type businesses available elsewhere.

Disc. I am not invested in Capital First but have exposure in Magma, SCUF and Bajaj Fin.

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17

Dear All

I’ve spent last 48 hours in reviewing Capital First and as an initial review I had lots of questions regarding the firm’s operations and accounting gimmicks. I’ve sent a mail to the IR seeking clarifications on many questions, so will post after their response. The company doesn’t have any unique services/products but then again everything is a commoditized within banking and financial services. What matters is the financial disciple, management vision and risk management that differentiates good banks from bad. Given the very short history of the company it is very difficult to predict the quality of management or the financial discipline. Having said that I’m not writing off the company but will need a lot more analysis before arriving at any conclusion.

Couple of things to keep in mind:

1). The company is held and controlled (more than 91%) by few bodies, so there is a concern on the liquidity and protection of minority shareholders rights.

2). Non-executive directors are paid commissions apart from sitting fees which clearly is against the interest of the shareholders.

3). Company has done quite a few accounting changes which has led to higher profits. Please read AR of 2012-13. I’m awaiting answers on some of these questions.

4). I do not see any strong reason for diluting shares and raising capital that was done this year. Again that goes back to the point that minority shareholders interests are not protected.

5). As Aveek mentioned there is a lot of dilution coming in the form of stocks issued to management and/or employees.

Naturally the company has lots of positives as well such as strong CAR, credit ratings, low NPAs etc but need more analysis.

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18

Thnaks Aveek and Punit and ithers, very interestinf analysis till now.This thread is growing, most ppl agree that this cud be a very good story, but many question are still unansered. That is the risk one may have to take, if you want to buy with 100 % surety, the price may also reflect the same.

I would also request seniors Donald, Hitesh bhai and Ayush to also comment on this promosing pick. Even a first cut comment will help all of us.

The only thing I am bullish on is the pedigree of CEO and his ex ICICI team i.e Vaidyanathan, he is a go getter. Also his intererst is aligned with minority shareholders as he also have close to 9 % stake.

Growth rate and nummebrs are really good, but they have a poor history as future capital. Mkt may trust new mgnt as time passes by qoq and they do walk the talk.

The other positive is fy13, 14 was pretty bad, so one will get adv of low base effect.

If they can reach RoA of 2.5 % and RoE of 17 % as per their 2019 vision, the stock could really head to triple digit by 2019.

It is also a v agrresive cyclcical play, with v agreesive mgnt when eco is turning into growth phase, the story is similar to M&M fin, Baja fin, which they ride during 2003-2008 period of economy. If eco revives to 8%, these deep cyclical will do really well. But one should exit with a right time frame of 5 yrs or valuations basis ( P/B is also v cheap here 1.3 fy14)

Any idea what Fy15 BV could be, if PAT is say 170 Cr ?

disc: took small position few days back after doing first cut analysis on screener

Request Hiteshbhai/Donald/Aayush and other seniors to comment as well

Best

Santosh

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19

Hi Punit,

Can you share the possible accounting gimmicks that you have discovers? It would help others also to look into them and also for future references.

Discl. Not invested

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Tried to find out BV from BS given in AR, if fy 15 PAT is 170 Cr, BV shud be close to 244 against 137 in fy 14

FY14 fy15 fy 16

PAT170 212 265

BV 137 244305

IfMr. M even give 1.5 to 2 p/b, stock could be at 600+ in fy 16, looks severely undervalued, Pls comment there cud be some flaw in my caclulations.

dis: invested in v small qnty this week only, trying to confirm the undervaluation !