Capital First -Buy at Rs 392.4 and add on dips to Rs 323 - Rs 340 for Target of Rs 476 in 2-3 quarters :: HDFC Securities

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CapFirst is a fast growing Non Banking Financing Companies providing financing to Retail and Wholesale Business. Besides SME
Loans and Mortgages the company also offers Consumer Durable Loans, Two-Wheeler Loans, Loan against Property and Small
Business Loans while in Wholesale Business it provides loans majorly to real estate developers. Warburg Pincus a leading
global PE firm holds 72.6% in the company. As on FY14, CapFirst had an AUM of Rs 9678 cr.
In the past couple of years, CapFirst has improved its performance with major thrust on retail side of the business. It changed
its focus on high risk and high ticket wholesale loans to low risk and high return retail segment. AUMs jumped from Rs 6185 cr
in FY12 to more than Rs.10,000 cr in FY15. Proportion of Wholesale to Retail segment stands at 19:81. It also exited its broking
business carried on through its subsidiaries last year. While the new management led by Mr Vaidyanthan did a commendable
job in scaling up the business, he also concluded the largest Indian buyout by Warburg Pincus. It now holds 71.6% in the
company. This backing by the leading global PE firm provides further comfort.
Other factors in favour of CapFirst is the low NPA levels and high PCR which provides the extra buffer even in trying times. The
immediate concerns are the low return ratios (ROE at 5.5% and ROA at 0.6%) which will have to improve if the company has to
arrive at sustainable levels of performance. We think the management is aware of the difference in ROE and ROA of CapFirst
compared to its peers. Apart from the leeway to increase lending due to comfortable CAR, any sustained steps to reduce the
above difference could straightaway improve bottom-line and book value boosting valuations.
Indian consumer finance market could witness 17-18% CAGR till 2020. While the market still remains underpenetrated (more
than two thirds of households have no liabilities of any sort), the banks and NBFCs have developed diverse products targeted
at all segments of the income pyramid, across multiple secured and unsecured loan types. Overall, we think consumer lending
can be a significant growth driver for Indian financials in the coming years.
Falling interest rates (as hinted by the latest repo rate cut should accelerate growth in demand for loans and in disbursements.
The key beneficiaries from such a movement in the rates environment would be strong retail asset franchisees and wholesale
funded entities. We think CapFirst could be one of such entities. We also feel that CapFirst could get better valuations over
time as it grows bigger in size (with equity issuances every 6-10 quarters) with clean asset profile and its management keeps
proving itself in seizing opportunities and growing profitably.
While Bajaj Finance currently quotes at 3.4-3.5xFY16E BV and 16-17xFY16E EPS, Sundaram Finance quotes at 3.6-3.7xFY16E BV
and 19.5-20xFY16E EPS. Though these two players are larger (especially Bajaj Finance) than CapFirst, the difference in their
PABV could narrow going forward
The stock at CMP trades at ~2.3x FY16E ABV and 19.5xFY16E EPS. Investors can buy at CMP and add on dips of Rs 323 -Rs 340
(1.9x – 2x FY16ABV and 16-17xFY16E EPS) with the target price of Rs 476 (2.8x FY16E ABV – ~24.0xFY16E EPS) in 2-3 quarters.

LINK

http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010736