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Centrum Capital

Overview:

Centrum Capital is a diversified financial services company which has established fee based businesses in
Investment Banking, Institutional Equities and Wealth Management and emerging Lending businesses in the
SME, Affordable Housing & Micro Finance segments. It has also recently entered Insurance Broking and Asset Management. In 2016, Jaspal Bindra acquired a ~20% stake in Centrum and became the new CEO of the group. Prior to joining Centrum, Jaspal Bindra’s last position at Standard Chartered was as the chief executive of the Asia Pacific region. He was credited with making Standard Chartered India one of the three largest international banks in the country by assets and its third-largest profit and revenue driver. His peers include Anshu Jain, co-chief executive of Deutsche Bank; Ajit Jain at Berkshire Hathaway; and Ajay Banga, president and chief executive officer of MasterCard (more on Bindra: https://economictimes.indiatimes.com/industry/banking/finance/former-standard-chartered-asia-chief-jaspal-bindra-to-pick-up-stake-in-centrum-group/articleshow/51723827.cms).

With the management change in 2016, the focus is now on lending plus fee-generating business. In June 2018, Centrum sold its forex business, Centrum Direct, to EBIX Inc. for approximately INR 1,200 crores (more on EBIX transaction: https://www.centrum.co.in/uploads/newsroom/press-release-cdl-ebix-sale.pdf). It has ventured into housing finance, SME loans, micro finance, insurance broking and asset management in the past two years. The company has now put in place the corporate structure and management team to tap into the growth opportunities in the lending space over the next 3-5 years.

Centrum Group Corporate Structure

Housing Finance business:

The company started the housing finance company (HFC) business in Dec-16 and its focus is on the affordable housing segment, largely in tier 2-3 cities. According to the company, the focus is on the Central and Western regions of India initially, before gradual expansion in other regions. The low- to middle income segments are its target customers because these segments are underserved by the banks, given their very small average ticket size. Centrum Capital’s housing finance loan book comprises largely mortgages with no
exposure to developers. The company operates a hub and spoke model, with 40 hubs and 85 spokes currently. The company is building its housing finance loan book in a gradual manner, without comprising on asset quality. Currently, the average yields are ~12.5% with spreads of ~2.5%. The average ticket size is INR 10-12 lacs with loan-to-value (LTV) ratios of 65-70%. More than 50% of its customers are salaried employees. The loan book stood at INR 178.3 crores as on March 31, 2018 and stands at INR 450 crores as of Feb 2019.

SME and Micro Finance businesses:

The company’s SME loans are largely working capital loans (the basis of which are the cash flow of borrowers). For this division, the company focuses on four customer segments: 1) micro, small and medium enterprise (MSME) loans 2) lending to micro finance/smaller non-bank financial companies (NBFCs), 3) real estate, and 4) supply chain management. Currently, the average ticket size is INR 10-15 crore, with 2x collateral and personal guarantee of promoters. The average yields are 13-14%. In December 2018, Centrum acquired L&T Finance’s Supply Chain Finance business (more: https://www.livemint.com/Companies/fhtD5aBgSY5FGqCRoQOlNL/Centrum-acquires-LT-Finances-supply-chain-business.html). The acquired business has a loan book of approximately INR 800 crore, a staff strength of 50 professionals and operates out of 16 cities in India. Its SME loan book stood at INR 360 crore as on March 31, 2018 and stands at INR 1,400 crore as of Feb 2019.

In November 2017, Centrum obtained approval from the Reserve Bank of India to commence Micro Finance Lending operations and simultaneously acquired the micro finance business of FirstRand Bank India (more:https://www.livemint.com/Companies/mIwXSa53Fo0e140YHaxePM/Centrum-Capital-to-acquire-FirstRand-Banks-microfinance-bus.html). FRBI’s micro finance business comprised of around 70,000 customers with an average ticket size of INR 20,000, operating in Maharashtra with an employee strength of over 300 people. The loan book of its micro finance business stood at INR 117.6 crore as on March 31, 2018 and stands at INR 250 crore as of Feb 2019.

Wealth Management business:

Centrum’s wealth management business is the fifth largest in India by AUM (INR 18,500 crore as on 31 March 2018 and approximately INR 21,000 crores currently).The number of clients and advisors stood at about ~8,400 and 155 respectively as on March 2018. The company’s wealth management business provides value-added services such as estate planning, trust services, investment structuring, tax and legal advisory services, to its target customers, ultra-high net worth individuals (HNIs) and family offices. The company has developed strong research capabilities to have a competitive advantage over its rivals in the wealth business. The division’s gross yields are ~100bp on average. The strong AUM growth of its alternative investment funds (AIF) business led to above-historical average yields of 117bp in FY18. As of end-FY18, 40-50% of AUM is comprised of equity and the remaining 50-60% is made up of debt and structured products.

Emerging businesses - Insurance Broking and Asset Management:

Centrum received a Direct Insurance Broking license from IRDAI in Aug 2017. The license will enable Centrum to tie up with all Life, General and Health Insurance companies in India to offer their products to Centrum’s clients. The insurance premium collected grew from approximately INR 35 crores to INR 65 crores in FY2018. The business operates out of 15 cities and Centrum is targeting to generate a revenue of INR 500 crores through insurance premiums over the next 5 years, by leveraging synergies across the Group’s other business of wealth management and lending.

Centrum Alternatives was incorporated as a LLP in July 2017. During its first year, the focus was on building
team capabilities and consolidating Centrum’s third party investment management activities under Centrum
Alternatives. The business aims to launch funds focused on private equity, public equity, private debt and real
estate. Kalpavriksh is Centrum’s maiden PE fund which invests in high growth unlisted companies in consumer, education, technology, healthcare and wellness sectors. Its current investments include Littlemore, The Label Life and the HEAL Institute. In March 2019, the company announced plans to launch a INR 500 crore structured credit fund (more: https://economictimes.indiatimes.com/industry/banking/finance/centrum-to-launch-rs-500-crore-structured-credit-fund/articleshow/68448747.cms?from=mdr).

Management Team:

  • Jaspal Bindra (Executive Chairman) - ex Asia Pacific Head of Standard Chartered. Joined in 2016.
  • Nischal Maheshwari (Head - Institutional Equities) - ex Head of Institutional Equities at Edelweiss Securities. Joined in 2018.
  • Rajendra Naik (Head - Investment Banking) - Part of founding team, with Centrum since 1996.
  • Rajnish Bahl (Head - Wealth Management) - ex Head of Branch Banking and Wealth Management at HSBC India. Joined in 2010.
  • Ranjan Ghosh (Head - NBFC) - ex Global Head of Commercial Banks, Securities & Asset Financing at Standard Chartered. Joined in 2016.
  • Sanjay Shukla (Head - Housing Finance) - ex MD at CentBank Home Finance. Joined in 2016.

The key shareholders are the Byramjee family (founders), Chandir Gidwani and Jaspal Bindra who own approx. 20% each. Both Chandir Gidwani and Jaspal Bindra have been increasing their stake via market purchases over the last 12 months.

Financials:

The market cap of Centrum is INR 1,423 crores as on 18 March 2019. I am not including a financial summary here as the business has changed significantly post divestment of the forex subsidiary. Hence the historical financial data is not representative of the current business, and the company only publishes consolidated financials at year-end. According to the company secretary, they will begin publishing quarterly consol financials from Q1 FY20.

Summary:

I like Centrum as a diversified financial services play in the small cap space because its serving large, scalable - and highly competitive - markets in India. With the recent on-boarding of respected industry leaders who have significant skin in the game and the timely exit of the low-margin forex business right before the liquidity crisis hit India’s NBFC sector, Centrum seems to be well positioned to grow from here. I’d love to have the views of other VPers who are tracking this company as well.

Disc. Invested. Data from research reports, annual reports and various news articles.

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I have not understood why can’t they prepare a simple corp ppt every quarter so that common folks could make sense of what is happening inside. No. of subsidiaries has grown by leaps and bounds and it is difficult to make sense which ones are doing well or track performance.

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Hi enelay. I have also been invested in centrum for 24 months now. Feel like I should have booked out at 90. It’s fallen to 27-28 levels.
I hold decent quantity at an average price of 50. You think I should continue to hold for the long term? I don’t mind holding for another 3 years. You think we will see 200-300+ levels in this stock?

My cost is also around 50 and this is approx 20% of my PF. Waiting for the year end results to decide the next course of action. I’m expecting the numbers to reflect the growth I’ve described in my initial post but obviously the devil is in the details. I don’t see any reason for panic right now and my only real concern is at the high % of pledged shareholding - I think that’s a major overhang on the stock price. It’s a bit hard to monitor these guys because they don’t issue any presentations or calls, hopefully this will change soon.

Revenue and other figures not comparable on a YoY basis.
EPS at 1.77 vs 0.77.
Net profit at 78 cr vs 41 cr.
EBITDA -260 cr. This is worrying since they are able to report a profit on a consolidated basis because sale of forex business.
Consolidated reserves at nearly 600 cr. This is good and provides good cushion to provide loans.
Dividend announced at 5 paise per share. 1000 cr fund raise is also on cards.
I think true picture will emerge in annual report regarding various business verticals.
My view: strong hold for another year at least and see the story play out.
Your thoughts?

Any other updates regarding the company’s progress? There has been heavy buying by some 3rd party… Promoters have also increased their stake. Recently 3 cr pledged shares have been released… All positive developments

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Sir, this is not a competition. No need for sarcasm.
Share your thoughts / analysis, if you have any.
All companies have been beaten down pretty bad. And over the last 2 years, the word NBFC is a strict no no. But in over the same period, CC has managed to grow its loan book to over 2k crore.
Sure, there is a lot of scope for improvement in transparency and communication.
I will hold and wait, I guess. No other way out.

Hello fellow members, Any developments in centrum capital? I am holding good quantity at an average of Rs.70. Why it is going down every single day?

Yes, it’s a painful hold. I have been holding at an average of Rs 40 for the past 2 years. Average has come down because I was able to buy more recently at Rs. 12 per share.

Their housing finance biz has raised INR 190 cr recently for 25% of the biz and is well capitalized. I watched an interview on youtube where the CEO said they were looking to sell similar stakes in their microcredit and SME lending arms. But this was pre-covid.

The company is not investor-friendly in the sense that there are no investor presentations or conference calls. Minimal disclosures and opaqueness of management makes the company hard to value.

Hopefully things will start to improve.

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Kindly share your views / concerns.

Would help everyone in the forum…

Anyone actively tracking centrum capital here?

Feel like there is a revival on the cards…

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Hey. I have been tracking the business. They have been rather cautious with their lending business. NBFCs are returning to business slowly - centrum should see some revival soon.

Recent move in the stock could be late reaction to hope of economy opening up or build up to some news or some manipulation. Eager to hear soon from management /read annual report.

Recent up move could be due to potential acquisition of PMC bank.

Promoter’s pledged shares have also reduced significantly

Still waiting to hear on that bid. But smart money may know something, that we aren’t privy to. Nonetheless, I believe we have held through the pain period. Good days ahead

Any idea on how Centrum would be valued once they are able to acquire PMC bank

Closest category would be SFBs for benchmarking (not same ofcourse). But more than the valuation, it will be the business that we need to look at.

Mr Jaspal Bindra is a seasoned banker. Acquisition of PMC bank (if bid is approved) looks like a step closer to get into banking. India bulls wanted to go the same way through LVB.

It is very difficult to find out management plans of this company. No con-calls/ interviews. Annual report too doesn’t divulge too much info.

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I had hoped that with BharatPe being the partner and they will be in the driving seat. The combined entity would be valued much higher. Almost at a Fintech valuation or even more for a banking license.

Those valuations should be much different that any listed bank.