9 OCT 217 Company Update BUY Target Price: Rs 92 Structural changes in the making We recently interacted with the management of Capital First (CAFL) to get insights of the business and the way forward. The management aims ~25% AUM growth in each of the next two years backed by strong growth in retail financing. CAFL is witnessing strong traction in two wheelers, consumer durables and business loans while it is adopting a softer stance towards loan against property book (share likely to go down to ~35% by FY19 from current ~45%). Added focus on higher-yielding assets and realigning liability mix can improve core NIM by ~5-1 bps by FY19. Expect GNPAs/NNPAs to stay under 2%/1% going forward while C/I ratio is expected to decline to <5% by FY19 due to improvement in top line, increasing productivity, and operating leverage. CAFL is trading at 2.6x FY19E P/ABV. Maintain BUY. CMP : Rs 749 Potential Upside : 23% MARKET DATA No. of Shares : 98 mn Free Float : 64% Market Cap : Rs 73 bn 52-week High / Low : Rs 839 / Rs 465 Avg. Daily vol. (6mth) : 941,286 shares Bloomberg Code : CAFL IB Equity Promoters Holding : 36% FII / DII : 26% / 11% Key highlights Riding the high growth phase The management targets an AUM of ~Rs 3 bn by FY19 and believes focus on retail products like two wheelers, consumer durables, and business loans can help achieve ~25% AUM growth in each of the next two years Core NIM can increase to 11-11.5% by FY19 (1.5% in Q1FY18) with improvement in yields and lower cost of funds (increasing share of non-bank loans; currently at ~5%) Asset quality is likely to stay manageable with GNPAs/NNPAs below 2%/1% going forward while C/I ratio should decline <5% by FY19, which in our view will be a key driver for RoA (~1.6% in FY19) Maintain BUY with a TP of Rs 92 (upside of 23% from CMP): We believe, CAFL s RoE is set to structurally improve from ~1% in FY16 to ~14% in FY19 on improved business (higher share of retail), NIM expansion, operating leverage and healthy asset quality. We value CAFL at 3.2x FY19E P/ABV to arrive at a TP of Rs 92. Financial summary (Consolidated) PAT (Rs mn) 1,662 2,389 3,147 3,915 EPS (Rs) 18 25 32 4 EPS chg 45. 34.6 31.7 24.4 Book value (Rs) 186 235 264 3 Adj. BV (Rs) 181 232 253 289 PE (x) 41.1 3.5 23.2 18.6 P/ABV (x) 4.1 3.2 3. 2.6 RoE 1.1 11.9 12.9 14.2 RoA 1.3 1.5 1.6 1.6 Net NPA.5.3.8.7 Key drivers Q2 17 Q3 17 Q4 17 Q1 18 AUM (Rs bn) 179 188 198 214 NIM (%, calc.) 9.2 9.4 1.1 1.5 GNPA 1.5 1.6 1.7 1.7 C/I ratio 53 49 51 53 GNPA ratio on 9 dpd basis Price performance 14 Sensex Capital First 12 1 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 1
Strong traction in retail AUM to continue CAFL has maintained a robust AUM growth over the past two years despite tenacious rationalization in its wholesale book (share in AUM down from 15% in Q1FY16 to 7% in Q1FY18) At present, mortgage loans/ LAP dominate the AUM with ~45% of the mix. Given the concerns surrounding LAP, the management likes to go slow along with higher levels of diversification bringing its share down to ~35% over the next 6-8 quarters However, being optimistic on retail financing, focus on two wheelers, consumer durables, personal loans and business loans should continue and more than compensate for the decline in LAP portfolio. This in our view will be relatively better off for both margin and asset quality The management continues to guide for ~25% AUM growth and aims for AUM of ~Rs 3 bn by FY19 CAFL is witnessing strong traction in the consumer durables segment due to expansion in newer stores, increase in productivity and better operating leverage The company registered ~.6 mn consumer durable cases in Q1 and is targeting an increased number in coming quarters. This sub-segment is likely to provide a strong margin support which has been on an continuous uptrend over past many quarters (5% in Q1FY14 to 1.5% in Q1FY18) More so, the management sounded optimistic on the growth in affordable housing space. This portfolio is at ~Rs 9.5 bn and the management aims to increase it to Rs 25-3 bn over the next 2-3 years. Increasing share of long tenure portfolio will help in better AUM growth Management aims ~25% AUM growth and targets an AUM of ~Rs 3 bn by FY19 AUM growth is likely to remain strong (Rs bn) 25 2 15 126 136 15 AUM 1 YoY Growth (RHS) 188 172 179 198 214 45 3 1 15 5 Existing levers can drive further margin expansion Change in product mix towards higher-yielding products like two wheelers (yield: 22-23%), consumer durables (yield: 27-28%), personal loans (yield: 26-27%) and business loans (yield: 18-19%) have driven rapid expansion in yields over the past couple of years Moreover, changing borrowing mix in favor of market borrowings has driven the cost of funds lower 2
The management intends to bring the share of bank borrowings down to ~3-35% over the next 18 months from ~5% at present, which will further bring the cost of funds down Also, CAFL has unutilized sanction lines worth ~Rs 15.5 bn from IFC and ADB that may cost at par/below the market rates, which in our view will bring granularity to its liability franchise and higher credibility The management believes that core NIM can further increase to 11-11.5% from 1.5% in Q1FY18 while including fees, NIM can increase by another 1-1.5% by FY19 In our view, the management s guidance of improvement in NIM is reasonable given that CAFL has ample scope to further increase its exposure to higher yielding loans and can realign liability mix to lower its cost of funds further Core NIM can further increase to 11-11.5% Margin expansion story should continue NIM (RHS) Yields Cost of Funds 2 1.1 1.5 12 15 7.1 7.4 7.8 8.3 8.4 9.2 9.4 1 8 1 6 5 4 Asset quality well under control In Q1FY18, CAFL s GNPAs increased by 77 bps QoQ to 1.7% on transitioning to 9 dpd. However, on a like to like basis it increased by mere 7 bps The management believes that given their strong underwriting standards, GNPAs/NNPAs is likely be maintained under 2%/1% going forward To maintain its asset quality, CAFL is not aggressively chasing growth in the LAP segment. More so, it is avoiding very high ticket cases and will like to maintain the average ticket size in the segment at Rs 1 mn GNPAs/NNPAs are likely be maintained under 2%/1% going forward 3
21 1 15 12 9 3 GNPAs are likely to stay under manageable levels GNPA NNPA PCR (RHS) 9 dpd (Bps) 174 171 165 172 152 159 121 86 89 113 97 1 1 14 56 48 46 19 4 2 Expect some improvement in C/I ratio CAFL s Cost/Income (C/I) ratio stood at ~51% in FY17. Despite no massive branch expansion plan in FY18, the ratio is unlikely to wane significantly given the distribution costs attached to the business and increasing share of retail advances CAFL has acquired a small equity stake (invested ~USD 5.5 mn) in Satin Creditcare (MFI) to leverage on its distribution network and not add a lot of physical branches on its own network. This will help in curtailing costs further and expand presence in the bottom of the pyramid However, improvement in top line, increasing productivity and operating leverage is expected to bring C/I ration down to ~5%/~48-49% in FY18/FY19 C/I ratio expected to decline to ~5%/ ~48-49% in FY18/FY19 C/I ratio expected to wane marginally going forward 1 4 2 Cost To Income (RHS) Net Income Growth Opex Growth 49 51 51 52 49 53 51 53 49 4 2 4
Financial summary (Consolidated) Profit & loss (Rs mn) Interest earned 16,678 23,888 29,118 35,863 Interest expended (8,972) (11,6) (13,718) (16,389) Net interest income 7,75 12,282 15,399 19,474 Non interest income 2,21 4,121 5,24 5,939 Net income 9,916 16,43 2,3 25,413 Operating expenses (5,41) (8,31) (1,188) (12,89) Staff expenses (1,768) (2,394) (3,116) (3,733) Other operating expenses (3,273) (5,916) (7,72) (8,356) Operating profit 4,874 8,93 1,415 13,323 Provisions & contingencies (2,364) (4,53) (5,718) (7,4) Pre-tax profit 2,51 3,564 4,697 5,844 Tax expense (848) (1,174) (1,55) (1,929) Profit after tax 1,662 2,389 3,147 3,915 Extraordinary item - - - - Minority interest/associates - - - - Adj. PAT 1,662 2,389 3,147 3,915 Balance sheet (Rs mn) Total assets 145,251 176,552 221,595 273,442 Cash & Balances with RBI 11,127 15,936 21,514 27,968 Investments 1,836 2,587 3,492 4,539 Advances 126,565 151,359 189,199 232,715 Fixed assets 194 476 464 476 Other assets 4,884 5,31 5,932 6,651 Total liabilities 145,251 176,552 221,595 273,443 Equity capital 912 974 974 974 Preference capital - - - - Reserves & surplus 16,123 22,64 24,892 28,466 Networth 17,35 23,38 25,867 29,44 Borrowings 119,549 141,81 181,73 228,16 Deposits - - - - Other liabilities & prov. 8,666 12,432 14,26 15,987 Key ratios Per share data FDEPS (Rs.) 18 25 32 4 BV (Rs.) 186 235 264 3 Adj. BV (Rs.) 181 232 253 289 DPS (Rs.) 2-3 3 Dividend payout 13-9 7 Yields & Margins Yield on advances 15.5 17.2 17.1 17. Cost of deposit - - - - Net interest margin 6.4 7.9 8. 8.1 Asset quality Gross NPAs 1..9 1.6 1.6 Net NPAs.5.3.8.7 Credit cost.2.3.4.2 Provisioning coverage 49. 68.3 5. 55. Capital Tier-I 14.5 16. 14.8 13.6 CAR 19.8 2.3 18.8 17.3 Efficiency ROA 1.3 1.5 1.6 1.6 ROE 1.1 11.9 12.9 14.2 Cost to income 51 51 49 48 CASA - - - - Effective tax rate 34 33 33 33 Growth Net interest income 54 59 25 26 Fee income - - - - Operating expenses 31 65 23 19 Profit after tax 45 44 32 24 Advances 42 2 25 23 Deposits - - - - Total assets 36 22 26 23 Note: Dividend for FY17 will reflect in FY18 due to change in reporting norms 5
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