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.
**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__
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.