Colourful growth

I had written about the potential of Kokuyo Camlin (KC) here in June ’12, just as Kokuyo of Japan has bought out a majority of the Indian promoters stake a year back, making it their majority-owned subsidiary. They have subsequently increased their stake to around 70% currently, while the Indian promoters (the Dandekar family) still hold a 5% stake. It was then trading @38. Kokuyo is a leading company in Japan with over 100 years of experience in stationery and furniture products, design and construction of office and store interiors, mail order business, lifestyle retail and distribution having an annual turnover US$ 3.2 Billion. At that time, Kokuyo had paid Rs.110/share for Camlin based on its brand strength and its distribution reach. However, post the deal, KC struggled for quite some time, getting to grips with their new owners. And they were not helped by the environment in general, and their industry scenario in particular which is still dominated by the unorganized sector. However, in the last year or so, things seem to have settled down for KC and the story is playing out to script. And Kokuyo seems to have broken even as far as their investment was concerned. It remains to be seen how Kokuyo plans to take it to the next level in order for their investment to be really profitable.

From the range of 30-40 and below at which it was languishing then, 3 years back, it has risen nearly 4-fold in this period, giving a compounded annual return of 40% in this 3-year period, a commendable feat indeed.

And promoter group holding has reached the maximum level of 75% now from 64% then, showing the confidence of the Japanese promoters in the company’s prospects. In fact after losses last year, it has come back in the green this year. With the Japanese promoters holding around 70% shares, it could also be a potential candidate for de-listing.

With India’s ever-increasing population and Modigovt’s stress on education for all school children, the demand scenario for KC’s products will continue to be good. The main risk is the undercutting by price-sensitive unorganized sector. But quality will continue to rule at least with the rowing middle-class.

However, even with all the good things likely to happen in the future, it is always prudent to take a part of the money off the table and retain the rest for the longer term to participate in the growth. So people who have entered at really low levels of sub-30s and 40s can surely book some profits and hold the rest for the longer term. And as always, it is always good to buy the share back if it falls significantly in line with the general market or after having run up a bit post some good news.

First among equals

Capital First (CF) is a Warburg Pincus (WP) company with WP holding close to 70% of its stake. And it has a top class management team led by ex-ICICI honcho Mr. Vaidyanathan. The coming together of these 2 top class entities, one bringing its global reach and expertise and the other sound leadership is already doing wonders to this company, and it can only prosper from here. 

I had written about this as a theme for 2015 and it has justified its faith, moving up by close to 22% from 366 in Jan. ’15 to 446 this week, a return of 22% in 6 months. However, I believe that there is more to come yet.

This company missed out on bagging a banking license this year which ultimately went to IDFC. Last four years, they have shown very good growth, beating the expectations and their own guidance and that too not at the cost of quality of assets, one of the things which have hit ICICI Bank badly in the last 2 years. So gross as well as net non-performing assets (NPA) numbers are minimal (net NPA of 0.17%). They appear to be taking a leaf out of the book of Baja Finance, another superb growth story over the last 3-4 years. 

CF has not only defined its strategy well but is also executing it systematically. As a part of this strategy, they 1) moved out of non profitable business like securities and commodity broking, 2) focused on core business of SME financing and 3) ensured best in class asset quality with higher provisioning than regulatory requirement. CF has steadily increased the composition of retail financing from 10% in FY10 to 84% currently, while it has grown its AUMs at 25% CAGR over FY12-FY15.

Also, it hasn’t failed to move into all the right areas at the right time, the latest one being into Housing Finance, thru a subsidiary Capital First Home Finance Pvt. Ltd (CFHFPL). As can be seen, housing finance companies have been on fire on the bourses for the last 2 years with many of them even tripling from their levels then. And with the Modi govt.’s thrust on housing with schemes such as Housing For All, affordable housing etc., this run should continue for a long time. The other major factor that is likely to work in favour of CF is the falling interest rate scenario which will lead to an increase in the demand for loans and disbursements.

An HDFC Sec report points out that Capital First is quoting at ~2.3x FY16E ABV (adjusted book value) and 19.5xFY16E EPS which compares favorable with its larger peers Bajaj Finance (3.4-3.5xFY16E BV and 16-17xFY16E EPS) and Sundaram Finance (3.6-3.7xFY16E BV and 19.5-20xFY16E EPS). Of course, the larger peers deserve the premium because they have higher RoEs and RoAs. However, there is a chance for the gap to narrow under the stewardship of V. Vaidyanathan. In an earlier interview in November 2014, V Vaidyanathan, CMD, CF, asserted that he is confident of achieving 25-30% over the next 2-3 years.

All in all, all the ingredients for a superb growth story are firmly in place.