CSL Finance Limited - Transition To NBFC

Stock Opportunities Untested - but worth a good look
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CSL Finance Ltd.

CMP -89 ,
MKT Cap – Around 42 crores

Introduction

Transition towards NBFC with cautious lending to have zero default book

The company strongly values the relationships with its clients, building on transparency
and trust with them. It looks after their best interests to allowing them the
flexibility to prepay and ensures quick turnaround time for loan processing and
approval. Over time the company has become the Lender of choice for small &
mid-sized companies in the Delhi NCR region looking for short term loans.

·
The due diligence process followed by the company is constantly improved to adapt to newer
challenges in the operating environment.

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Amongst other aspects, the company continues to lay emphasis on borrower’s cash flows,
borrower’s equity in the project during the due diligence process.

·
During the year under review, the company has added new clients to ensure rotation of its loan
book, so as to mitigate any exposure risks. With the slowness in the overall
economic environment, especially the real-estate sector, the company would be
following a more cautious approach to lending.

·
The focus will be to ensure the quality of its loan book by lending to high quality borrowers.
Aim to lend the borrowers with strong balance sheets, even if it comes at a decline in our yields.

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Post-disbursal of the loan, the company regularly conducts site visits, takes regular sales and
cash flow updates, to identify any stress as early as possible, which enable it
take corrective action at the earliest.

·
The systems and procedures of the entire lending model have evolved over the years on account
of continuous refinement.

Proprietary Investments, wherein the company trades in arbitrage opportunities arising in the
stock market like Open Offers, Demergers, Delistings etc; has done reasonably well during the year under review, despite the extreme uncertainty prevailing in the stock market on account of micro & macro-economic factors. It is also investing in derivatives and bonds .

They will gradually scale down the deployment of funds in this segment as our loan book
grows in the coming years.

Going forward, the company’s intends to focus on its Secured Lending business and further expand its loan book as it sees ample opportunities in the lending space, for those NBFCs which have the right set of people, knowledge, internal systems & network in place.

Financials

Income from operations has decreased to half but profits increased by 50% due to sharp reduction in purchase of inventory. Employee has been further increased from 1.25 crores to 1.32 crores
.

Promoter holding (CSL Holding Ltd. ) 75% of shares which is a good sign .

Equity shares - 46 lakh shares of 10 Rs each .

Company has cash balance of 11 crores ,short term loans and advances of 106 crores out of total assets of 110 crores
.

From balance sheet perspective short term borrowings increased more than 4 times whereas Non current investments and current investments got almost nil giving an indication of transition of
majority towards NBFC function

Investment Thesis

If salary is to be kept aside which is
not so easy , then company can have good growth in loan book through its credit
quality management and also having high tailwinds to the sector of NBFC .Also there is a probability of re- rating as currently very low valued scrip. Also current results are in favour of company and can grow further with diversifying loan book and getting more professionalised .

Red flags

Total salary is 1.25 Crores out of which 90 lakhs is paid to MD and rest 35 lakhs to all employees in FY 2015. As on 31 March 2015, the company has 11 people on its payroll.

Out of 8 crores profits , 12-13 % of it is paid as salary to Chairman Rohit Gupta which is a negative sign for considering the integrity of management . Also there is a 3 times increase in salary of MD whereas profits increased by 10%.

Annual report of 2016 and June results will give more clarity of their loan book growth

Disclosure – Not invested .First time initiating a thread so let me know if done anything wrong.

It would be good if senior VP members could give more insights about company technically and fundamentally and especially Management Integrity.

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Good Q1 results , transition to NBFC
Revenue - 18.89 crores
PAT - 6.1 crores
Upto 50% of previous year EPS has been made in this quarter .
Price has been on upper circuit from last month , not able to understand what is happening in this company at ground level .
Any VP members having any contact in Delhi can please help me on this .I am new on this forum

Disclosure - Not invested , tracking and showing some extraordinary moves.

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What help do you need?

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Just want to know about its promoters , its business on ground , whom they lends and also at what terms and conditions to know better about their business and risk management …At what level is their investment business and NBFC business which is showing such results

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PM me the address. Il go posing a costumer when possible. Scuttlebutt.

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Registered office
8/19, 3rd floor, WEA
Pusa lane, Karol Bagh
Delhi-110005
Number-011-4250344144

Thanks in advance

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Hey have you then went to the company posing as a customer ?

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As per AR 2016 , further details to add

Company has started operations from 2011 ,thus gained decent experience of 5 years till now.
Increase in Revenues from Interest Income has grown around 9% in FY16 which would be major revenue going forward .
Company has decided to merge its holding company with CSL Finance to provide better transparency to investors.
It has moved to a larger premises and aims to scale up its operations in the coming years.

Financials
During FY 17, the Company has taken a small credit size of Rs.10 crores from Kotak Mahindra Bank. With a more focused approach to lending, the company is aiming to take more debt on the balance sheet. It is working on getting additional lines of credit in the coming year.

The loan book as on 31st March 2016 is Rs 106.47 Cr spread over 26 borrowers with the average loan of Rs 4.10 Cr with blended yield of around 18.52%.
Company has given guidance 20-25% growth in loan book in future.
Company current investments though showing nil value due to accounting policy but having market value of around 3 crores .
Thus ,Including all this it has a Cash per share of Rs 11 which gives a margin of safety to an extent.

Also ,the major red flag in my last post which was salary of MD has been decreased a bit because profits have increased in FY16 but salary to MD has slightly decreased by 6 lacs per annum.
Chairman Kunal agarwal has been independent director which has been positive on corporate governance.

Disclosure - Added a tracking position .Stock has increased 3 times from period of my first post.

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Q2 FY17 Results

Revenue has shown 50% increase y-o-y from 5.5 crores to 8.5 crores in Q2.
Also profit has nearly doubled from 2.1 crores to around 4 crores which has been supported by decrease in purchase of stock in trade .

Some expenses like employee benefit expenses and Other expenses has increased.
Half yearly EPS stood at 21.5 whereas last year full EPS has been around 28.
So with CMP of 276 ,upside is possible through earnings growth and PE re -rating at later stage.

It would be good if Senior Vp members can comment on my analysis and company as I am a novice investor .

Disclosure - Holding a tracking position .

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Co website says they lend to small or medium sized real-estate sector & infrastructure development sector entities. Isn’t this a threat? With real estate being in doldrums, it is indeed a risky company and will thus trade at lower valuations.
Views welcome.

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Risks are there in this type of business .
They are related to real estate sector but it would be more related to small and affordable homes , so there is I think ample demand .
Also it is a secured lending business and thus much less risky .
Low Growth is not a parameter of riskiness but NPA which it is focused on and trying to manage .
If company keeps on giving healthy growth , it may see valuation in line with other HFCs .

Disclosure - Tracking position .

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Had attended the Last AGM in Delhi…Chairman was unable to attend …as he was away for business.
Few Observations:
Company has apppointed a New CEO named Mr. Sandeep Lohani…
( Ex-Chief Strategy Officer-Satin Credit Care)…he was with LOk capital when they invested in SAtin Credit care…According to him he helped build the strategy intitially together with Satin team…
He has moved about quite a bit…spending only an average of about 2 years in each organization he has been in.
This is the first time he has held the position of CEO and says wants to stay here for longer…
Right now they have about approx 100 crore outstanding loans to about 26 clients…the yield is at 20%…have sourced loan from Kotak recently at 16% all there loans are secured by collateral…

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Are you talking about the credit line of 10cr they took from Kotak Mahindra bank ??
Also seeing the recent speed of price increase I.e. 3 times in past few months , I had the doubt that isn’t it manipulated ??
Hope that’s not concern now as company is really working on ground ?
Also have they given any guidance on reducing cost of borrowing capital in near future ??
Thanks in advance .

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There is a big difference between a HFC & a developer financing co; and the difference in valuation should be huge.

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Yes i am talking about the same…when i asked about the cost of capital initially…they laughed it off…as most of their loans are being funded from funds diverted from the investments side of the business to the Secured Lending side. they have very little leverage right now…which gives them a large scope to expand the balance sheet

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Interesting.
But then they are growing the lending business at 20%. With such a low base they should be growing much faster.
Income from Investments is still more than interest income and so if investment income is low in a qtr/year; it can impact overall numbers…
Gaurav, did they give any targets about their business.

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And also in developer financing the loan is secured by constructed asset . Any further view about risks would be appreciated ?
I will get to know more in detail .

They have stated in annual report that they are slowly reducing their investment income and making negligible in their income . So they are ready to get transitioned to it .

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Some of the positives i think is that the promoters have brought in a professional from outside…How he executes…only time will tell…
Actually this company was taken over by the current promoter in the 2005 or so…until now they didnt see their organization as a listed entity …but bringing in an outsider could be a reflection of the company trying to grow…

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Had a one to one conversation with the CEO after the AGM… he said that they dont have any NPA’s yet…they in a period of 3 -4 months( since the AGM ) would arrive at the exact segment they want to cater to…he ruled out anything in core retail Consumer Durable loans etc.

Plus they are still just operating out of a single corporate office in Karol Bagh

With regards to Risk management he said ( i m forgetting the exact word he used) that they provide bridge loans so they would only come in and finance when guy needs just the last financing piece to complete the project (so that their is visible project progress for them) and in addition to that if it goes south their lending is secured…

I have gotten into it as an opportunistic bet since they are low in leverage and have just started to lend…i believe it will be some time before (2 years or so) before any core balance sheet issues start appearing…

Been invested at levels of 160…have averaged up since.

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Yes that I agree that they have a large scope of leveraging due to which I added a tracking position but if the rate of borrowing would be this high , then increase in NIM or profit would not be much and that will start reflecting in their profit in 2-3 quarters .

Any other views are invited …