Capital Trust Limited - Can we trust it with our money?

Market Capitalization: Rs. 179 crores
Current Market Price: Rs. 209

Company Overview

Capital Trust Limited is an NBFC, incorporated in 1985 for providing consultancy to foreign banks in India, they moved on to two wheeler vehicle finance with a joint venture with Kinetic Engineering in 1992. The company started microfinance in 2008 and became a Yes Bank correspondent for the same in 2014, they also started providing enterprise loans to MSME sector. The company has 77 branches operating in 16 cities in Delhi-NCR.

Business Model

The company focuses on the untapped market of financing micro and small enterprises in rural and semi-urban areas which are not covered either by banks or large asset finance companies. The company had applied for small banking license but failed to get RBI nod.

The company operates mainly in these three domains:

  1. Enterprise Loans
  2. Vehicle Loans - Two wheelers and Small Commercial Vehicles
  3. Microfinance Loans - Yes Bank Correspondent

The company has over 80% of its business in Western UP and Uttarakhand, it manages a total portfolio of Rs. 204.50 crores as of March 2015. Loans are provided for farming, dairy and livestock, small manufacturing firms, trading, home improvement, two wheelers etc.

The company has a strong audit and compliance procedure as many of its borrowers don’t have adequate literacy or assets.

The company has an in-house IT team which focuses on developing applications for collections and other operational processes. Every branch manager is provided with a tablet computer for operations, their management system uses Java J2EE as frontend and SQL server for the backend.

Financial Snapshot

The company has a market capitalization of Rs. 179 crores at the current market price of Rs. 209. It has shown consistent growth in both revenues and profits, despite high borrowing costs for the company, they have managed to maintain to Net Interest Margins at 10%. The company is maintaining the adequate CAR of 21.05%, Gross NPA stand at 0.63% and Net NPA at 0.52%, which looks good for a microfinance company.

Investment Rationale

The company has high room for growth and is available at decent valuations. We can also expect a small bank license in future though we can’t rely on it for making an investment decision. The opportunity is huge and owing to company’s low base, it is poised to achieve higher profitability in coming years. The company has around 1 lakh customers in 16 cities and plans to serve 2 million customers in 32 cities by the year 2020. The company’s Managing director and CEO, Mr. Yogen Khosla is young and dynamic and loves cycling. We can hope he will keep this company in good shape as he keeps his body. The company has competition from similar microfinance firms, but I believe there’s room for everyone to grow.

Disclosure: 200 shares @220, planning to buy more.

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A quick cautionary note: 100% equity dilution post conversion of warrants (alloted @ Rs. 117/- to promoter).


Discl: Not invested


This looks to be a good one based on financials (Check Value research online). For fin companies, promoter background and NPA are of paramount importance. In this case, promoter’s integrity has to be conformed for taking a plunge. Friends around NCR may help.

Looks like a growth machine. Most impressive is AUM growth of 90 % last few years. NPA is also under control
I have no idea about promoter
Read that ex RBI deputy governer, SC retired judge etc were also been promoters

Tracking closely

Concern raised by Sandeep is very true. The equity dilution would lead to the EPS getting halved and the P/E doubling if the price is assumed constant. At current price there is no MoS.
Keeping a close track, would add below 170 levels.

Disclosure: Not invested

What is the cut-off date for conversion of warrants and why is this diluted EPS not reported in the Quarterly report?

The business prospects look very exciting to me as they are present in the MFI space as well. SKS, the MFI leader, is looking for a 50%+ growth this year.

Promoters have been selling stocks. They sold 1 lakh shares in bulk deal yesterday. Even on Friday, they sold 50,000 shares. They have been regular sellers. They have to sell a large quantity so that after warrant conversion, their holding does not go above 75%. Will this overhang of selling let the stock move up? valuations are not low either - p/bv 5x, p/e 21x on fully diluted basis!

Good set of results by Capital Trust - they do not mention growth in loan book but their net profits have climbed up by 100% - a phenomenal growth - anyone has any idea as to what is the impact of the warrant conversion?

If equity base becomes double after warrant conversion, then does it mean that the PE ratio will become double and the price to book value will become half (because the capital base has also doubled)? Also does it mean that the promoters will put in fresh capital at a price of Rs. 117 per share * 75 lakh shares (as in their investor presentation) = 87 crore of fresh capital into the company???

Would appreciate if someone can help me with the impact of the warrants!

Promoter already converted 10 lakh warrants - once balance 65 lac converted, fresh capital 57cr comes in (65 lakh11775%). As is the case with finance companies, company will then leverage this tier-1 capital with 6-7 times debt capital.Hence, about 400cr rise in loan book with corresponding disproportionate rise in profits. while equity base will rise by 76% (150/85), profits will rise by much more.

I have been regularly following this stock and comes in my screener formula regularly . Just don’t have the courage to invest significantly in this stock at this junction although .

Apart from the pros which have been mentioned in this thread , i have couple of concerns which is holding me back

  1. The promoters and warrants - Although they have not taken any illegal route , the approach towards minority investors looks callous. However may be the business need to infuse capital must have prompted them in the warrants way , but what lingers in my mind is , Why only Warants? when there are multiple other ways to infuse capital especially when the promoter is having a very high shareholding percent? Still, i do admit the warrants might not be a bad move at all for the company, its just not the best way of optimizing shareholders wealth (Sounds like a paradox? , yeah it is )

  2. Poor business acumen? Looking at the way the company has been doing its business in last 25 years there is no stability in the business nor the commitment to grow it. They have ventured into multiple avenues and discarded them to pursue new ones and plenty of failures all along the path . Although MFI is luring , how can we be sure they will be sustaining this?

  3. Are the books real? - Biggest Concern over small and micro cap companies. We never know . Unless some actually knows the employees of the companies and it is quite difficult to track these people on Linked In. Tried contacting a few employees, but got a rude questions backs for stalking and gentle ignores. Being Yes Bank 's Business Associate is a soothing factor, but considering Yes Bank’s risk appetite, i am not so comfortable again . I would have been more confident if it has been a Business Partner of HDFC or Kotak who are more prudent (How do i know? some past experience of working in a Bank’s credit Dept infused these subjective feelings)

I have plenty of positives and trigger points , but still some fear called the gut feeling is holding back! Anyone can throw some light to ease the pain

Discl: Have a nominal Rs 5000 invested for tracking purpose invested @190. With a stomach and risk appetite to write off upto 50% of my investment



This company charges 36% (approx) to its customers !!
The mgmt lends at 18% and the outsiders lends at 16% !!
100% equity dilution !! (of course with the funds earned from the high interest rates).
and then continuous block deals to sell the excess stock!!

I called the CS of the company. The call was forwarded to the CFO of the company (I dont know if he was really the CFO). He talked arrogantly. He in fact insulted me. Really speaking I was curious about the high ROE business even though I had doubts about the promoter integrity. But, after talking to this guy, I was clear not to invest here.
RBI regulations came in for MFIs which capped the lending rate at 25% (approx - based on the RBI formula).
Cant this same regulations start applying to these SME lending companies in future if RBI decides to?? I am not sure here. Others please help.

I have made a short analysis about the current situation and would be impact if the RBI regulation comes in.
Correct me if I am wrong anywhere.
Capital trust impact.xlsx (15.9 KB)


Stock Story - Capital Trust

Capital Trust is a NBFC registered with RBI engaged in providing loans to SME sector in India. Average lending rate revolves around 36% and the average borrowing rate comes to around 16-18%. Company has its main markets in Uttarakhand and western areas of Uttar Pradesh. This segment of lending does not have the capping regulations as are applicable in case of MFIs by RBI. We do not even see such capping limits to come in near future, simple reason being SME segment being a comparatively risky sector where typical loan amount ranges from 2 lacs to 6 lacs, wherein the loan amounts in MFI sector are very less (around 15000) and are sourced through JLG model (which poses less risk for lending firms). Hence, the current ROA of the business which is 9% will be sustainable in future.

27th January -

Mr. Yogen Khosla applied for 75 lacs warrants in the company. Total number of shares in the company at that time were also 75 lacs. So, 100% dilution.

22nd May -

Board of directors approves allotment of 75 lacs warrants to him at 117rs (price is based on SEBI formula). CMP on 22nd May was 200rs. Please do not compare between 200 and 117 and come to the conclusion that there is a corporate governance issue. The price of 117 is based on SEBI formula. Promoter was lucky that the stock moved up. Stock could have moved down also. Also, we should note that the FY 15 results were declared between this time (January and May) and the company posted excellent result. Stock should have ran up due to the fundamental growth.

27th July -

10 lacs warrants converted to equity shares at 117rs. Till now promoter held 52.90 lacs shares out of the total shares of 75 lacs giving him 70.53% ownership. After 10 lacs shares more his holding increases to 74%. As per SEBI any purchase of shares (either by dilution or by issuing new equity shares) of more than 5% of the total equity capital will have to be executed by open offer. 10lacs on 75 lacs is 13.33%. Promoter holds now 52.90+10 = 62.90 lacs shares out of the total capital of 85lacs. Promoter forgets to make the open offer. Coming back to this later.

In September -

Promoter sold 3.02 lac shares via block deal (I guess). This was to comply with the SEBI guidelines of maintaining promoter holding 75% or less than that. He had to sell these shares (even though his holding was below 75%) so that he can convert warrants at a later date. Now Promoter holding is 70.44% ((62.90-3.02)/85*100).

28th March -

Company converts another tranche of warrants of 32.90 lacs shares at 117rs. Also, 30.75 lacs shares issued to non promoters at 217rs. Total Equity shares on this date is 85lacs+ 30.75+ 32.90 = 148.65 lacs shares. Out of this promoter holds 92.78 lacs shares. Promoter Holding is 62.41%.

29th March -

Coming back to the open offer not done at the time of 1st warrant conversion of 10lacs shares. Management decided to convert another tranche of warrants on 28th March so that both the warrants come in the same financial year and as per SEBI guidelines promoters will have to only make one open offer. In this case, since the price of the stock is well above 263 rs (the open offer price), the open offer shall stand canceled. Promoter holding remains same.

Story to come in -

7th June -

Open offer closes and the result will be the same.

Before November -

Promoter will have to convert the last tranche of warrants of 34.7 lac shares . Again this will trigger open offer since promoter will be acquiring another 23.34% of the total equity shares in the company. Total equity shares will stand at 148.65+34.7 = 183.35 lac shares. Of this promoter holding would be 92.78+34.7 = 127.48 lac shares. Promoter’s holding will be 69.52%.

During the same period -

Open offer will be made. Now will it be exercised by the existing shareholders again depends on the CMP of the stock at that time.

Conclusion - Dilution is not always bad. Good and Bad depends on the terms of dilution. If the promoter issues warrants at a Price/Book ratio of more than 1, then the dilution is beneficial for the existing shareholders of the company. Promoter issued warrants to themselves at 4.68 price to book which is good for the shareholders. Combined with that the SEBI guidelines also protect the shareholders. If I were standing at the warrants issue date, I would think rather opposite - promoter is going to sell a huge stake in market through block deals (due to this shareholding exceeding 75%) which will bring downward pressure on the stock price. At that time QIP plans were not at all there. If QIP were not there, promoter’s holding would be definitely above 75% which would trigger stock selling by him. It was a probability game. It was fortunate that QIP came and promoter did not have to sell his stake. So, promoter got just lucky here. He is able to convert his warrants at 117 when the market price is 380. There are no corporate governance issues in this entire story. If no one gives you capital in your business, you need to infuse yourself to grow. Dilution is very common and it is not always bad.

Moreover, this is a green flag that light house is one of the QIPs. Light house is known for its due diligence before investing a penny in a business. This guarantees the management quality.

Business is just superb, borrow at 16% and lend at 36% generating a phenomenal ROA of 9%. Which financial sector company generates 9% ROA. Even MFIs generate 5%. Top banks generate 2%.

RBI regulations on interest rate cap for MFIs will not be replicated in this model because of its inherent risk. There is less competition in this segment. Equitas is one such company which is engaged in lending to SME segment also. But they plan to cater to west and south markets only. North is open for capital trust and the market is huge.

We should closely track this company. I take back my previous comments where I expressed my negative views.

Valuations -

Equity shares as on 30th sept, 2015 - 85 lacs.
addition in equity shares - 32.90 lacs (warrant conversion) + 30.75 lacs (QIP).
Total Equity shares - 148.65 lacs shares.
Total Equity Capital - 1486.5 lacs or 14.865 cr.
Preference shares have been paid off (check asset/liability status on 30th sept 2015 as released by the company). 18% fixed cost savings.
Money received against share warrants will be reduced to (190125000 - 92531250) = 97593750 rs. Calc - (32.90 lac shares/ (32.90+ 34.70 lac shares))*100.
Historical Debt - Equity ratio has been 4 +.
Assuming growth rate of 160% (calc based on 9 months results - profit of 14.07 cr for 9 months is 120% growth in reserves); reserves at the end should be close to 17.6 cr + 11.47 cr = 29.07 cr.
Securities premium should be added to the reserves earned on conversion of warrants and issue to QIP. Total premium on warrants will be 32.90 lac shares * 107 = 35.20 cr.
Total premium on QIP will be 30.75 lac shares * 207 = 63.65 cr.
Total premium added will be 98.85 cr.
Total reserves and surplus estimated is 98.85 cr + 17.6 cr + 11.47cr (beginning value) + (30.61-11.47-8.56) = 10.70 cr of premium already included in reserves and surplus on conversion of 10 lac warrants (10 lac shares * 107). Total reserves has to be close to 138.62 cr.

Total book value at the end of the financial year will be 138.62 cr + 14.86 cr + 9.75cr (application money recd.)= 163.23 cr.
Book value per share - 163.23 cr / 1.4865 cr shares = 109.84 per share.

CMP is 380 rs.
Price to book is 3.46 times.

Assuming debt equity of constant 4 +.

A stock with 9% ROA and 50% + ROE with negligible NPAs and excellent business dynamics. Should this stock be purchased at a P/BV of 3.46 times is the question.

Filters -

Good mgmt - Yes, ex-RBI (chairman i guess) on board and no red flag against the mgmt.

Growth - Yes, huge market.

Longevity of growth - Yes, for next 3-4 years at least.

Business quality - Least competition and high return ratios. Operating in UP and Uttarakhand areas is not easy with such low NPAs.

Valuations - Dont know whether they are cheap or expensive. Please someone help here.

Disc - Not yet invested. Just digging and digging and want to be completely sure before investing. But, yes I like this stock now. Please do your own diligence. Also do correct me if there is a mistake anywhere in my calculations and understanding.


book value has increased substantially - ROE will no longer be 60%. it will come down substantially.

Of course yes Abhishek…but that’s temporary…this new funds are going to get new business… Which is going to give the same ROE again…

How much more disbursement do you calculate they will be able to do without dilution? Isnt most of the dilution on account of cash already infused long before (warrants are being converted to equity now but the cash been infused long back and probably already consumed)

Only 25% cash was taken at the time of issue of warrants…75% will be infused when warrants are converted.

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Hi…from where did you get the figure of 36%(company charges to customer)? it is 3% per month…does not look realistic when satin, janlaxmi, sks etc. provide for 18%-24%?

Hi Naveen,

Please check my sheet uploaded in my first comment. I have calculated the average lending rate. Also, you should compare apples to apples. RBI has issued separate regulations for NBFC - MFI, wherein it has capped the interest rates charged by these MFIs to approx 25% (there is a formula based on which the lending rates are decided). MFI has low risk due to its low borrowing limit per client (15000) and its JLG model. The risk is high in SME funding because 2.5-5 lacs are given to single borrower.

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Thanks Abhishek…will look at the sheet. Irresepective of competitors, did you verify this 36% from customers/employers of capital trust or in some report(data source?)I was told by an SME guy that the interest rate they charge is is 18% hence want to confirm.