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.
In just over a year, CF has risen more than 58% and is currently quoting around 728 from 446 when this was written. It has ridden the NBFC bull wave very nicely indeed. And with a quality management led by Vaidyanathan, ample liquidity in the market currently and the current flavour for NBFCs in the market (primarily due to the lack of an NPA problem here unlike banks which are well and truly plagued by it), good times may continue for some time.
ReplyDeleteHowever bear in mind that it is not quoting cheaply or attractively. With continuous good results, strong growth confidence shown by a credible management, it will continue to attract premium valuations for times to come. However, if u consider it in comparison to the current no. 1 NBFC Bajaj Finance which is quoting at 7-8 times its book value, this is quoting at half of that. No wonder it is touted by some as a BF in the making.