ValuePickr Forum

Capital First Ltd

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.


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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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.


a good read on the informal economy mostly comprising MSME

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

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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.


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.


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



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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

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 !

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.**

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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.

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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.

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.

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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.


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@ 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…


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 !

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

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.