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Wednesday, August 3, 2016

BIOCON LTD: GROWTH IS IN IT'S DNA !!!

Scrip Code: 532523 BIOCON
CMP:  Rs. 831.00; Market Cap: Rs. 16,620 Cr; 52 Week High/Low: Rs. 846.80 / Rs. 395.30
Total Shares: 20,00,00,000 shares; Promoters : 12,13,57,446 shares – 60.68 %; Total Public holding : 7,86,42,554 shares – 39.32 %; Book Value: Rs. 202.74; Face Value: Rs. 5.00; EPS: Rs. 46.82; Dividend: 100.00 % ; P/E: 17.74 times; Ind. P/E: 27.59; EV/EBITDA: 11.75 times. Total Debt: Rs. 2,477.70 Cr; Enterprise Value: Rs. 17,970.70 Cr.
   
BIOCON LTD: The Company was incorporated as Biocon India Private Limited on November 29, 1978 and is based in Bengaluru. Biocon Limited is a biopharmaceutical company, which is engaged in the manufacture of pharmaceuticals, medicinal chemical and botanical products. The company came with an IPO in February 2004 with an offer of 1,00,00,000 equity shares of Rs. 5 each at Rs. 315.00 per share, raising Rs. 315 Cr. It got listed on April 7, 2004 at Rs. 425 and made high of Rs. 506.70 with a low of Rs. 425 on listing day. The objects of the issue were to achieve the benefits of listing on the Stock Exchanges and raising capital for financing to setting up new facilities to augment our capacities for submerged fermentation and chemical synthesis operations & for the other corporate purposes. The company gave bonus in April 2008 in ratio of 1:1, and has not given any in its shares. The Company operates through two segments: Active pharmaceutical ingredients (Pharma), and Contract Research And Manufacturing services (CRAMS Contract Research). It is engaged in manufacture of biotechnology products for the pharmaceutical sector, and also engaged in research and development in the biotechnology sector. The Company is also engaged in providing contract research and manufacturing services to overseas customers in the field of synthetic chemistry and molecular biology and undertakes clinical research activities on discovering new biomarkers and is discovering new diseases subsets and data-based on pharmacogenomics. Biocon’s presence straddles in four main therapeutic areas: Diabetology, Cardiology, Nephrology and Oncology and plans to introduce two new divisions, Comprehensive Care, and Immunotherapy. It offers a portfolio of bio similar insulins, recombinant proteins and monoclonal antibodies. Its products include Insugen, BASALOG, BIOMAb EGFR, Abraxane, CANMAb, ALZUMAb, ERYPRO, BLISTO, Cytosorb and Cimivir. In research services, Syngene International Limited (Syngene) is engaged in the business of custom research in drug discovery while the other fully owned subsidiary Clinigene International Limited (Clinigene) is in the clinical development space. Syngene is a now a listed entity in Indian Capital Market. In December 2009, Biocon acquired the Active Pharma Ingredients (API) undertaking from IDL Speciality Chemicals Ltd., a subsidiary of Gulf Oil Corporation Limited. BIOCON Ltd is locally compared with Alpa Laboratories Ltd, Panacea Biotech Ltd, Hester Bioscience Ltd, Wockhardt Ltd, GlaxoSmithKline Pharma Ltd, Jubliant Life Sciences Ltd, Wyeth Ltd, Lyka Labs Ltd, Cadila Healthcare Ltd, Novartis India Ltd, Syngene International, Vivo Biotech Ltd, Celestial Biolabs and Globally with Anavex Life Sciences Corp of USA, Bayhill Therapeutics, Inc. of USA, Cephalon Inc of USA, Halozyme Therapeutics Inc of USA, Immunex of Denmark, Myriad Genetics, Inc of USA., OncoMed of USA, Proteolix of USA, Tanox , Xoma Corporation, Taconic of Denmark, QPS of Austria, Baxalta (Shire) of Austria, Pfizer of Belgium, Sanofi Genzyme of Belgium, Ergomed of Bosnia, Allergan of Bulgaria, Lonza of Cezch Republic, Novozymes of Denmark, Novo Nordisk of Denmark, Medix Biochemica of Finland, Graftys of France, Allecra Therapeutics of Germany, Bioaxis Healthcare of Greece, Omixon of Hungary, Pinewood (Wockhardt) of Ireland, GlaxoSmithKline Pharma of UK.

Investment Rationale:
Biocon started as a niche player with its unique expertise in fermentation technology to build global leadership in manufacturing and supply of statins. Over time, the statin business was commoditised, but the company leveraged its expertise in fermentation to build its presence in high-entry barrier biosimilar space. The company has accelerated its biosimilar development efforts to emerge as a front-runner in the race to launch biosimilar products in regulated and developed markets. The company has four biosimilar products (Insulin Glargine, Trastuzumab, Pegfilgrastim, and Adalimumab) in late stage clinical trials intended for approval in developed markets (US and EU). Besides having a front-end product business, Biocon also successfully nurtured and developed contract research and manufacturing business, which was recently listed on the bourses as Syngene International. By virtue of its strong client relationship and full service offering in the contract research and manufacturing space, Syngene continues to grow at a notably fast pace at more than 20 %. The characterisation capabilities that the company has developed by virtue of its developmental efforts on the biosimilar front is being leveraged for filing of Abbreviated New Drug Application (ANDA) application on complex chemical drugs products like Copaxone. The company so far has made 7-8 ANDA applications and is looking for 5-6 filings each year. The company potentially runs a cost advantage on these products by virtue of Global scale in APIs of these products. Biocon is aspiring to reach US$1bn in annual revenues by FY19 and believes that a large part of the potential growth will came from sale of biosimilars, and there will be growth in branded formulations business and research services business. The biotechnology sector of India is highly innovative and is on a strong growth trajectory. This sector, with its immense growth potential, will continue to play a significant role as an innovative manufacturing hub. The sector is one of the most significant sectors in enhancing India's global profile as well as contributing to the growth of the economy. India is among the top 12 biotech destinations in the world and ranks third in the Asia-Pacific region. India has the Second-highest number of US Food and Drug Administration (USFDA) approved plants, after the USA and is the largest producer of recombinant Hepatitis B vaccine. Out of the top 10 biotech companies in India (by revenue), seven have expertise in bio-pharmaceuticals and three specialise in agri-biotech. The Indian biotech industry holds about 2 % share of the global biotech industry. The biotechnology industry in India, comprising about 800 companies, is growing at an average rate of about 20 %. The Indian biotechnology sector is expected to grow from the current US$ 5-7 billion to US$ 100 billion by 2025, growing at an average rate of 30 %. Biopharma is the largest sector contributing about 64 % of the total revenue followed by bioservices at 18 %, bioagri at 14 %, bioindustry at 3 %, and bioinformatics contributing to 1 %. With the country offering numerous comparative advantages in terms of R&D facilities, Knowledge, skills, and cost effectiveness, the biotechnology industry in India has immense potential to emerge as a global key player. India constitutes around 8 % of the total global generics market, by volume, indicating a huge untapped opportunity in the sector. Outsourcing to India is projected to spike up after the discovery and manufacture of formulations. Hybrid seeds, including GM seeds, represent new business opportunities in India based on yield improvement. India currently has a marginal share in the global market for industrial enzymes that is estimated to reach about US$ 4.4 billion by 2015. Hence, there is an opportunity in focused R&D and knowledge-based innovation in the field of industrial enzymes, which can innovatively replace polluting chemical processes into eco-friendly processes that also deliver environmental sustainability. India has all the ingredients to become a global leader in affordable healthcare. If there is an annual investment of US$ 4.01 billion to US$ 5.02 billion in the next five years, the biotech industry can grow to US$ 100 billion by 2025, with a 25 % return on investment, and set a growth rate of 30 % year-on-year. For Biocon, the small molecules segment accounts for 42 % of the turnover and comprises Active Pharmaceutical Ingredients (API) like statins, immune-suppressants and specialty APIs and also includes generic formulations business. This vertical is witnessing pricing pressure in some products. The company is exploring fewer opportunities but with higher profitability in this segment such as moving into formulations and filing own ANDAs, 505 (b) (2) filings, etc. It has already filed seven or eight ANDAs cumulatively. These include complex generics and injectable. It is expected that the small molecules segment can grow at a CAGR of 13.5 % to Rs. 1,787 crore in FY16-18E. The biologics segment includes novel biologics and biosimilars, including rh-insulin, insulin analogs, monoclonal antibodies and recombinant proteins. This segment accounts for 12 % of the Biocon turnover. Biocon is mainly focusing on following therapies -diabetology, oncology and immunology. The company has invested heavily in this space over the last two or three years, especially the Malaysian facility. The progress, so far, is encouraging with launches in emerging markets, Glargine launch in Japan and filing arrangements in the EU and US. Biologics is expected to grow at a CAGR of 40 % in FY16-18E. Biocon’s research arm SyngeneInternational Ltd contributes 32 % to its turnover. Syngene is the contract research organisation (CRO) arm of Biocon with proven capabilities. The company caters to 256 clients including eight out of global top 10 global players. This segment has been consistently growing at 20 %+ rate. Syngene provides variable cost alternative like full-time equivalent (FTE) and fee-for-service (FFS) to the traditionally fixed cost, in-house, resource intensive business model of R&D focused organisations. The company has developed long-term relationships and has multi-year contracts with its clients, including three long-duration multidisciplinary partnerships with Bristol-Myers Squibb (BMS), Abbott Laboratories (Singapore) and Baxter International. The company also provides clinical research and clinical trial services through its subsidiary Clinigene. In August 2015, Syngene had raised Rs. 550 crore through IPO. Recently, it has been the major growth driver for the company as biopharma segment has seen some slow down. It is expected that the revenues from it to grow at a CAGR of 25 % in FY16-18E. The branded formulations business includes the finished dosage business in India and overseas including UAE. It constitutes 15 % of the Biocon turnover. It comprises Indian domestic formulations. Biocon owns 80+ brands encompassing therapies like diabetology, oncology, nephrology, cardiology, immunotherapy, comprehensive care and bio-products. Four of its biosimilar products (Trastuzumab, Pegfilgrastim, Adalimumab and Insulin Glargine) have already reached the critical milestone of global Phase III clinical trials. The company is also planning to start US and EU filings from FY17 with Mylan. Biocon entered into a partnership with Mylan for six biosimilar programs (Trastuzumab, Pegfilgrastim, Adalimumab, Bevacizumab, Etanercept and Filgrastim) and three insulin analog programs (Glargine, Lispro and Aspart). Biocon’s Japanese partner Fujifilm Pharma (FFP) has launched Insulin Glargine in Japan. The company has received approval for its Insulin Glargine from the Japanese regulator in March 2016. Insulin Glargine BS Injection Kit (FFP) has been developed and manufactured by Biocon and is being commercialised by FFP in Japan. Among therapies, diabetology is the largest therapy, which accounts for 60% of branded formulations. Some of its unique launches are INSUPen (insulin delivery device), Biomab (novel biologic for oncology) and Alzumab (novel biologic for Psoriasis). The pipeline includes CANMAb (biosimilar version of oncology product Herceptin). This segment constitutes 15 % of overall sales. Biocon is India’s premium biopharmaceutical company, which has demonstrated industry-leading capabilities in developing the most complex biosimilar products. The company is a frontrunner in the race to introduce biosimilar products for developed markets. In recent weeks, Biocon’s stock price has run up notably in anticipation of growth presented by the launch of biosimilars in regulated markets. And it is believed that Biocon will continue to post growth in coming future.

Outlook and Valuation: 
Biocon Limited is India’s largest and fully-integrated, innovation-led biopharmaceutical company. As an emerging global biopharmaceutical enterprise serving customers in over 100 countries, it is committed to reduce therapy costs of chronic diseases like autoimmune, diabetes, and cancer. Through innovative products and research services it is enabling access to affordable healthcare for patients, partners and healthcare systems across the globe. It has successfully developed and taken a range of Novel Biologics, Biosimilars, differentiated Small Molecules and affordable Recombinant Human Insulin and Analogs from Lab to Market. Some of its key brands are INSUGEN® (rh-insulin), BASALOG® (Glargine), CANMAb (Trastuzumab), BIOMAb-EGFR (Nimotuzumab) and ALZUMAb (Itolizumab), a first in class anti- CD6 monoclonal antibody. It has a rich pipeline of Biosimilars and Novel Biologics at various stages of development including Insulin Tregopil, a high potential oral insulin analog. Biocon’s Herceptin derives about US$2bn in sales from Herceptin in international markets. It is believed that not all of Herceptin sales in international markets will be immediately accessible for biosimilar players because of different intellectual property or IP situations and regulatory bars across geographies. There are ways that biosimilars can look to play the emerging market potential. One is to cannibalise the existing market pie and the other is to expand access by discounting the prices to a level where affordability is significantly enhanced. For now, Biocon will discount its biosimilar by 60 % and get an 8 % share of the available pie i.e. 50 % of international markets’ sales and also expand the market by 20 % from the current level. This translates into incremental sales of US$75mn in international markets. Biocon’s has unexpired patents protecting Lantus, Biocon may enter the market only after a settlement with Sanofi and can reach the market in second-half of 2018. It is expected to have double-digit royalty payment from Biocon/Mylan to Sanofi. Biocon should be the third entrant after Eli Lilly and Merck. And there is a very low probability that pharmacists may be allowed to substitute Lantus with biosimilars. In a best-case scenario, pharmacy substitution for Lantus may be allowed for vials. However, the vial market is reducing every year and with the launch of Toujeo the cannibalisation of vial market (most of which is in US) will accelerate significantly. The recent run up in the stock price has discounted a greater proportion of the potential opportunity, but the risks are underappreciated. Direct competition from other biosimilar players and next generation molecules from innovators casts major uncertainty over realization of potential benefits in the near to mid-term. The investments that have been made so far are significant and the business would require further investments. This would limit free cash flow generation. Over the next 3-4 years, the larger part of the opportunity for Biocon will be driven by emerging markets, while regulated markets will have limited contribution. A better way to play the potential opportunity presented by the biosimilar space would be a large cap pharma company that is poised well in the biosimilar space. On financial side, Biocon during Q1 FY17 reported consolidated net profit of Rs. 166.60 Cr an increase of 31.97% from Q1 FY16. It reported its consolidated revenue for the quarter which rose by 17.94 % to Rs. 982.40 Cr. During Q1 FY17, Biocon reported consolidated EBIDTA of Rs. 304.00 Cr up by 28.98 %. During Q1 FY17, it reported its consolidated Profit before tax to Rs. 232.00 Cr. EPS of the company stood at Rs. 8.33 a share during the quarter, as against Rs. 6.31 per share over previous year period. Biocon’s gross R&D spend stood at Rs 92 Cr in Q1 FY17, reflecting the progress of Generic Formulations, Biosimilars and Novel programs. Net Sales and PAT of the company are expected to grow at a CAGR of 12 % and 13 % over 2015 to 2018E respectively. There’s significant capex towards biosimilar manufacturing and foray of Syngene into Contract manufacturing will limit free cash flow generation. With encouraging developments on biosimilars front in last six months have hogged the limelight especially the approval & launch of Glargine in Japan and presentation of Trastuzumab data to ASCO. And launches in emerging markets are also getting momentum. These developments are testimony to Biocon’s progress. With the Malaysian facility getting ready for global filings, it is believed that the future bodes well for it on the biosimilars front. It will also provide an extra lever for growth besides Syngene and branded formulations. Strong performance of the company during the quarter has been driven by an all- round growth of its business across Small Molecules, Biologics, Branded Formulations and Research Services. Biologics business delivered a growth of 53 % driven by the sales of biosimilars in emerging markets. The submission of Pegfilgrastim, Biocons first biosimilar filing in EU, is a critical milestone this quarter. Biocon Insulins business made a mark with the launch of Insulin Glargine in Japan. In addition the company received regulatory approvals from MoH, Malaysia, for rh-Insulin and Glargine which will enable commercialization of these products. Biocon is on track for filing some of its Biosimilars and Generic Formulations in the developed markets later this year. On SOTP (sum-of-the-parts) basis, the value of BIOCON alone comes at Rs. 534.40 per share valueing 22 x its FY18E EPS of Rs. 24.30. The valuation of the Syngene taking valueing Biocon's at 74.60 % stake comes to Rs. 372.26  per share. And valuing the whole gives us the value of BIOCON of Rs. 906 per share. At the current market price of Rs. 831.00, the stock is trading at a PE of 27.97 x FY17E and 24.93 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 29.70 in FY17E and Rs. 33.33 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.   

SOTP VALUATIONS : (FY18E)
Business Subsidiary 
Value Per Share ()
BIOCON Standalone
534.40
Syngene International (EPS Rs.18.5 x 27PE) Rs. 499.50
 Biocon's value in Syngene per share (74.60%) 
372.26
TOTAL Value per Share (Rs.)  
906.66 

KEY FINANCIALSFY15FY16EFY17EFY18E
SALES ( Crs) 3,089.813,485.403,973.354,489.89
NET PROFIT (₹ Cr)497.43896.10594.73666.62
EPS () 24.8744.8129.7033.33
PE (x)32.5218.0527.2324.26
P/BV (x)4.953.993.483.05
EV/EBITDA (x)21.4118.0115.4014.01
ROE (%) 16.16 23.9413.8013.38
ROCE (%)22.5517.5817.5316.78

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*As the author of this blog I disclose that I do not hold  BIOCON LTD in my any of the portfolios.

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This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible. 


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I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article.
 

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Saturday, July 23, 2016

CAPITAL FIRST LTD : THE NEXT BIG NBFC !!!

Scrip Code: 532938 CAPF
CMP:  Rs. 675.45; Market Cap: Rs. 6,162.65 Cr; 52 Week High/Low: Rs. 694 / Rs. 321.00
Total Shares: 9,12,37,744 shares; Promoters : 5,94,85,602 shares – 65.20 %; Total Public holding : 3,17,52,142 shares – 34.80 %; Book Value: Rs. 172.13; Face Value: Rs. 10.00; EPS: Rs. 18.17; Dividend: 24.00 % ; P/E: 37.09 times; Ind. P/E: 27.26; EV/EBITDA: 14.95 times. Total Debt: Rs. 11,587.16 Cr; Enterprise Value: Rs. 16,806.55 Cr.
   
CAPITAL FIRST LTD: The Company was founded incorporated on October 18, 2005, and is based in Mumbai, India. It was formerly known as Future Capital Holdings Limited ("FCH") the then financial services arm of the Future Group which was a business group focusing on consumption-led businesses in India. FCH was promoted by Pantaloons Retail (India) Ltd ("PRIL"), the flagship company of the Future Group. Later the Future Group no longer remained as promoter of this company changed The company changed its name from Future Capital Holdings Ltd to Capital First Ltd in 2012. The company came with an IPO on January 11, 2008 with an offer of 64,22,800 equity shares of Rs. 10 each at Rs. 765.00 per share, raising Rs. 491.34 Cr. It got listed on February 1, 2008 at Rs. 1,044 and made high of Rs. 1,100 with a low of Rs. 826.10 on listing day. The objects of the issue were to achieve the benefits of listing on the Stock Exchanges & to raise capital for expansion of their retail financial services business, in particular, to meet the expenses of the Issue; to meet the long term working capital requirements of the Company and for the other corporate purposes. The company has not given any bonus or splits in its shares. Capital First was formed in 2012 as a result of a management buyout of an existing NBFC. The promoter of the company is the highly reputed Global Private Equity Fund, Warburg Pincus, United States of America, with Capital of USD 45 billion (Rs. 2,49,819 Crores). In September 2012, Warburg Pincus acquired 70 % stake in the company for Rs. 810 Crores, including fresh investment of Rs. 100 Crores into the company which was the largest FDI in India in financial services in 2012-13. Warburg Pincus is a leading and highly reputed global private equity firm. Founded in 1966, Warburg Pincus in India has supported and built large and reputed corporations like HDFC Limited, Kotak Mahindra Bank Limited, Bharti Tele-ventures Limited and Ambuja Cements Ltd. Warburg Pincus further infused an additional equity of Rs. 128 Crores of Tier I capital in March 2014, additionally to this, in March 2014, HDFC Standard Life insurance Company Limited from the HDFC group, infused Rs. 50 Crores which again contributed to the Tier-I capital of CAPITAL FIRST. HDFC Life is a leading life insurance company in India, HDFC Limited, which owns 72.37 % of HDFC Standard Life Insurance Company ltd, is a leading and reputed Housing finance institution in India. During May 2013, Capital First Home Finance Pvt. Limited (CFHFPL), a wholly owned subsidiary of Capital First Limited (CFL), received the Housing Finance Company (“HFC”) License from National Housing Bank (“NHB”). CFHFPL is now operating as an HFC and growing its housing Finance assets gradually. In September 2013, CFL decided to close its broking business including securities broking, commodities broking and property services to focus on the core lending business focusing on the retail finance. The Company has completed the winding up of the operations related to the broking business and is in the process of surrendering its broking licenses. During FY13 and FY14, the Company scaled up all the MSME and retail finance businesses and the Asset Under Management (“AUM”) cross Rs. 10,000 Cr in the first quarter of FY15. The no of customers Financed since Inception also crossed the figure of 1.0 million during this time. CAPITAL FIRST Ltd is locally compared with Bajaj Finance Ltd, Shriram Transport Finance Ltd, Mahindra & Mahindra Financial Services Ltd, Sundaram Finance Ltd, Cholamadalum Investment & Finance Ltd, L&T Finance Holdings Ltd , Shriram City Union Ltd, Muthoot Finance, Reliance Capital, Bharat Financial Inclusion Ltd, Indiabulls Financial Services, IDFC, Edelweiss Financial, Mannapuram Finance and Globally with Ally Bank of USA, Wells Fargo of USA, Chase of USA, Toyota Capital , Capital One of USA, TD Auto of USA, Americredit of USA, American Express of USA, ICBC Leasing of China, Huarong Leasing of  China, Orix Leasing of China, Herlad Leasing of China, Societe Generale Leasing Solution of France, BNP Paribas Solution of France, De Lage Landen International B.V of Netherlands, Unicredit leasing of Italy, Deutsche Leasing of Germany, Nordea Finance of Sweden, TransFin-M of Russia, Gazprombank Leasing of Russia, Santander Espana of Spain, Banco Espirito Santo of Portugal, Asset Advantage Group Ltd of UK, Bank of America of UK, Caterpillar Financial Services of Switzerland.

Investment Rationale:
Capital First Ltd is a provider of financial service across consumer and wholesale businesses, with aspirations to grow into a significant financial conglomerate. Capital First Ltd. is an NBFC with record of consistent growth & profitability. Capital First Ltd has a comprehensive product suite to meet multiple financial needs of customers including Consumer Lending, Corporate Lending. It offers products like Loan against Property, Two-Wheeler Loan, and Durable Loan, Business Loan, Insurance, Corporate Loan. Its Investment Advisory offers its advisory services to various segments such as private equity, real estate and research. In equity segment, company advises investment manager. In real estate segment, company provides range of advisory services in area of project evaluation, land acquisition, project conceptualization and design, leasing, property management and investment exits. In Retail Financial Services, company has introduced “Future Money” which is provides financial products and services. Since inception in 2007, Future Money has expanded to 145 points spread across 30 cities. Future Money offer consumers a range of products and services such as credit, life insurance and general insurance products and Future Card. In Wholesale Credit, the company provides due diligence in various asset class such as private equity, real estate and special situations. This segment of the company focuses on the area of project and acquisition financing, and other special situations related financing and also acts a promoter. Micro, Small and Medium enterprises form a large part of the Indian Economy. They generate employment and act as a catalyst for socio-economic transformation in India. There are more than 5.77 Cr MSME enterprises across India employing more than 6.9 Cr people. MSME sector, especially the unorganized micro and small enterprises, lack in the support from the existing ecosystem, and owing to their small scale which in turn is an impediment to their growth. India has a diversified financial sector, which is undergoing rapid expansion. The sector comprises commercial banks, insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds and other smaller financial entities. The financial sector in India is predominantly a banking sector with commercial banks accounting for more than 60 % of the total assets held by the financial system. India's services sector has always served the country’s economy well, accounting for about 57 % of the gross domestic product (GDP). In this regard, the financial services sector has been an important contributor. India’s gross domestic savings (GDS) as a percentage of gross domestic products (GDP) has mostly remained above 30 % since 2004 and stood at 34.2 % in FY15. It is expected that the domestic savings in India will reach US$ 1,272 billion by 2019 from US$ 683 billion in 2013. The financial services sector consists of the capital markets, insurance sector and non-banking financial companies (NBFCs). The asset management industry in India is among the fastest growing in the world. Total asset under management (AUM) of the mutual fund industry clocked a compound annual growth rate (CAGR) of 15.9 % over FY07-15 to reach US$ 150 billion.  India is today one of the most vibrant global economies, on the back of robust banking and insurance sectors. The country is projected to become the fifth largest banking sector globally by 2020, as per a joint report by KPMGCII. The report also expects bank credit to grow at a compound annual growth rate (CAGR) of 17 % in the medium term leading to better credit penetration. There is a lot of scope for growth in the financial services sector with the total wealth holdings by High Net worth Individuals (HNWI) in India, which is estimated at US$ 584.5 billion, projected to reach US$ 3 trillion by 2020. Also, there is potential in the rural credit sector which can be tapped by ensuring timely loans that are critical to the agricultural industry. The total viable and addressable debt within the MSME sector is Rs. 26 lakh Cr, of which immediately addressable demand is Rs. 9.9 lakh Cr. Of this, the banking system is likely meet upto Rs. 6.4 Lakh Cr demand and balance i.e., Rs. 3.5 Lakh Cr, will need to be met by other channels such as NBFCs, etc. Over the past 2-3 years, secured SME loan or loan against property (LAP) has gained flavor and has been hard sold by banks as well as NBFCs. With banks’ corporate portfolios facing asset quality issues, they have been incrementally focusing on gaining traction in their retail portfolios. This traction was partially achieved by focusing on lending towards SME / LAP segment. NBFCs’ penetration in SME / LAP financing too is on the rise which they offer as a primary product. Apart from this, other parameters such as giving fillip to NBFC’s SME financing book are Given funding cost disadvantage and huge untapped business potential, NBFCs/HFCs have ventured into high-yield asset class such as LAP to maintain profitability; Compared to < 40 % market share in mortgages, NBFCs/HFCs account for more than 52 % of SME / LAP market; Self-employed customers account for almost 85 % of LAP disbursements, of which 75 % are non-professionals and 10 % professionals. Salaried class account for only 15 %; and Businesses’ increasing funding requirement and accessibility to financiers have prompted more customers to opt for LAP / SME financing. With an increasing awareness amongst borrowers, the secured SME / LAP segment has posted strong growth over FY12-15. Having said this, with deeper penetration and rising customer awareness, CRISIL believes that LAP / SME financing has further legs to continue to grow at 20 % over FY16-18E. People with negligible credit history faced a dearth of financing avenues since banks shied away from lending to them. It was NBFCs which stepped in and created a niche by lending to such customer segments. Further, with a strong link to the grassroots, expertise in specific asset classes and deeper penetration in rural & unbanked markets render NBFCs a critical cog in catering to this segment’s requirements. Over time and as NBFCs developed customised products and brand identity, even customer segments with credit histories like SMEs, partnership firms, etc have been shifting from banks to NBFCs. Even CRISIL in its LAP / SME report has acknowledged the rising proportion of NBFCs/HFCs within the LAP / SME financing segment’s share has jumped to 51 % in FY15 from 47 % in FY13. With an increasing pie of LAP market and rising share of NBFCs, overall latter’s share is estimated to Rs. 1.8 lakh Cr in FY17E from Rs. 1.1bn in FY15, > 25 % AUM CAGR. CAPITAL FIRST LTD, under the current management’s aegis, has structurally transformed its business model. The company has trained an unwavering focus on rationalising its wholesale financing book through selective lending, curtailing its proportion to as low as < 15 % in FY16 from 70 % plus in FY11. Leveraging on management’s DNA, CAFL, from FY11, has sharpened focus on the retail financing segment and has seamlessly emerged much stronger and dominant player and in retail portfolio clocked > 40 % CAGR over FY12-16 to Rs. 13,700 Cr. CAFL has been generating sub 10 % in ROE’s over past 5 years but it is unwarranted as return ratios are bound to be depressed at a time when the company is investing in people, processes and technology for retail transition. The company’s RoE has remained sub-optimal owing to 2 primary reasons: relatively lower NIMs; and higher cost income ratio. India’s consumption story is undisputedly one of the strongest in the world. Within that, the consumer durable story is a burgeoning opportunity with market size which is expected to catapult to Rs. 2.02 lakh Cr by FY2020E from Rs. 1.01 Lakh Cr in FY16. Such strong growth potential will be led by not only rise in per capital incomes, but also shift from unorganised to organised market, urbanisation, increase in the standard of living and reduction of replacement cycle. This analysis is also well corroborated with increasing proportion of consumer expenditure towards consumer durables (durables plus semi-durables) to 11.5 % in FY15 from 10.8 % in FY13. With rising urbanisation and break down of joint families into nuclear families, the proportion of consumer durables bought under financing arrangements is bound to surge. Such financing arrangements are offered by banks through their debit card or credit card model as well as NBFCs through additional credit. However, the latter, primarily Bajaj Finance and Capital First, have made their mark by penetrating deeper and tying up with manufacturers as well as dealers, making it almost an oligopolistic market. This is also reflected in slower growth in banks’ lending to the consumer durable segment. Recently, the company has approved fund raising via issue of rated, listed, secured, non-convertible securities in the nature of debentures (NCD’s) to the tune of Rs. 100,00,00,000 plus green shoe option of Rs. 100,00,00,000 on private placement basis. This security will be listed on wholesale debt segment of National Stock Exchange of India. The future of CAPITAL First Ltd looks promising considering limited market participants and there will be increasing room for niche NBFC’s which are fuelled with capital, deeper penetration, and technologies in place, to capture the increasing overall consumer durable financing pie. This sector enjoys oligopoly situation. While CAFL has also been focussing on building a granular LAP / SME financing book, with deepening penetration in rural areas, the company has immense potential to achieve 20 % to 25 % growth over the next 2-3 years while maintaining its asset quality at its best.  

Outlook and Valuation:
Capital First Ltd. is a systemically important NBFC with record of consistent growth & profitability. Capital First Ltd has a comprehensive product suite to meet multiple financial needs of customers including Consumer Lending, Corporate Lending. It was earlier know as Future Capital promoted by Biyani group. In 2012, Warburg Pincus acquired majority stake and infused additional capital in the company. It is managed by Mr.V.Vaidyanathan (ex ICICI) and also has 14 % stake (including options) in the company. It has a total AUM of Rs. 13,600 Cr with strong distribution network across India spanning over 222 towns and has employee strength of 1,249. It has transformed its focus from corporate to retail over last 5 years. Retail composition has increased from 10 % in FY10 to 86 % currently. It offers complete product suite to meet the financing needs of primarily its MSME customers. It also provides loans to salaried employees, professionals and corporate. Within retail it offers loans against property, consumer durable and two-wheeler financing. It has a healthy rating of AA+ for long term and A+1 for short term which along with a trustworthy promoter enables the company to raise funds at competitive rates. Company aims to increase its AUM to Rs. 25,000 Cr to Rs. 30,000 Cr in medium term with continued focus on retail loans which should also keep the spreads benign. It targets ROA of 2-2.5% and ROE of 18% in medium term. CAPF operates in a niche and less competitive SME finance market with 61 % of its AUM in SME, Two Wheeler loans is about 8 % to 9 % of its AUM and Consumer Durable Finance is about 10 % of its AUM, which together comprise 80 % of its overall loan book. CAPF provides financing for purchase of consumer durable goods like refrigerators, televisions, air- conditioners, laptops, smart phones, printers, washing machines etc. These loans are offered to salaried and self-employed Customers as well as to small business persons. The Company has spent a lot on technology and developed a credit scoring system. It collects Customer data on parameters like age, whether self-employed or salaried, type of industry one works for, number of dependents, married or unmarried, has a credit card or not, has a home loan or not etc. The score card engine, after doing thousands of combinations and permutations, provides ample judgmental score-card which enables the company to take a Credit decision within 15 minutes of a customer approaching a dealer or a store. Quick turnaround time and credit decision is biggest USP of the Company. The experience which the company has garnered cannot be easily replicated. This is a fast growing segment posting a 142 % CAGR over the past three years with a ticket size of Rs. 30,000, average loan duration of eight months and average LTV (loan to value) of 76 %. The company has tied up with leading consumer durable manufacturers and dealers including large retail value Chains across India to promote further growth in this segment. CAPF also provides financing to retail consumers for the purchase of new two-wheelers. These loans are generally availed by micro-entrepreneurs and salaried employees. It is also a fast growing segment, posting a 146 % CAGR over the past three years with a ticket size of Rs. 44,000, average duration of two years and average LTV of 70 %. The company has extensively tied up with over 900 two-wheeler dealers across Tier-1 and Tier-2 cities in India who help the company to source borrowers of such loans. This segment is expected to remain strong and expect to grow 50 % CAGR over FY15-FY18E. As a part of its strategy to exit unfocused and unviable businesses, CAPF has exited gold loan business in FY15 because of business non-viability and regulatory restrictions. Gold loan portfolio will get completely off the company’s books by the end of FY16. CAPF follows a conservative and prudent policy of matched funding for assets. It is one of the very few companies in India to follow such matched funding which gives it great asset liability stability. As a key strategy to manage healthy cash flows, the company borrows for a longer tenure than actuarial maturity period of its assets. Hence, total inflows in each maturity bucket are higher than total outflows in respective buckets, which provides the company adequate liquidity at all times. The strong ALM strategy is one of the key pillars of strength of the company on a structural basis. Floating rate loans are funded by floating rate liabilities to cover interest rate risk. Adapting a well-matched ALM also protects the NIM at a desirable level. Despite difficult macro-economic conditions, CAPF has been able to manage asset quality at a superior level, thanks to the company’s strategy of moving towards granular retail loan segment with adequate collateral as against corporate lending earlier. It has framed detailed procedures and policies for underwriting across various product categories based on credit profile of the customer. As of September 2015-end, its GNPA as well as NNPA ratio stood at 0.86 % and 0.48 %, respectively. The increase in GNPAs in 1QFY16 is because it moved to 150-day NPA recognition norm from 180-day norm earlier. The company provides for assets on a 90-day basis. If GNPAs are recognised on a 90-day basis, they will increase to 1.5 %. As per regulations, the company has to gradually move to GNPA recognition on a 90-day basis in the next two years and therefore we have factored in the increase in GNPAs accordingly. If NBFC are allowed to access SARFEASI, they will be eligible to acquire property which can enhance recovery process. CAPF’s credit process is decentralised with segregation of authority and responsibility across functions to ensure inherent checks and balances for effective risk management. To avoid any conflict of interest, the company has segregated credit policy division, origination team, credit underwriting, operations, and collection vertical. Also the loan portfolio has shifted to relatively safer segments like LAP, mortgage, two-wheelers and consumer durables as against risky developer loans earlier. CAPF follows a highly stringent underwriting process. In mortgage business, only 37 % of total applications reach the disbursement stage after passing through several levels of checks, mainly centred on cash flow evaluation, CIBIL check. Insufficient cash flow or improper documentation remains the main reason for loan rejection and accounts for 39 % of rejection of total cases assessed for sanctioning loans. With strong underwriting processes and procedures, asset quality of the company is healthy. As per regulations, the company have to gradually move to a 90-day GNPA norm in the next two years, whereas it already provides for assets on a 90-day basis. Its provisioning is far stringent than what is required by the Reserve Bank of India. It writes off two-wheeler loan or consumer durable loan if it is due for more than five months and four months, respectively. Similarly, it writes off MSME loan if it is due for more than 360 days. The company has also opted for early phased compliance of RBI regulations on higher standard asset provisioning. It has done standard asset provisioning of 0.3 % in FY15 as against regulatory requirement in FY16. Credit costs increased in 1HFY16 as the company provided an additional Rs. 9.3 Cr for writing off mortgage loans due in 360 days as against 720 days earlier. Return ratios of the company were subdued in the past on account of a change in the accounting policy and significant spending on technology. From FY13, it started amortising processing fees over the tenure of the loan as against its earlier policy of booking it upfront. After this, fee income, as a percentage of advances, dipped to 0.4 % in FY13 from 1.8 % in FY12. With normalisation of previous year amortisation, fee income, as a percentage of advances, improved to 1.3 % in FY15, which is expected to improve further. Also, the company’s policy on stringent provisioning is likely to put less strain on future profitability. With spending on technology complete, operating leverage is expected to kick in, RoA improved from 0.6 % in FY14 to 1.1 % in FY15. Similarly, RoE improved from 4.9 % in FY14 to 8.3 % in FY15. And it is expected that RoA & RoE to improve to 1.8 % & 15.9 %, respectively, by FY18E. The management has given RoA & RoE guidance of +2 % & 18 % by FY19E. Apart from the strong underwritng standards, CAFL has set its LTV on a very conservative basis—LTV is decided by the lower of the cash flow assessed eligibility or property value based eligibility—resulting in LTV of 42 % against industry norm of 60 % to 70 %. Capital is never a problem for the company as it has a backing of its strong promoter Warburg Pincus. As of September 2015-end, the company’s total CRAR stood at 20.1 % (against the RBI’s requirement of 15.0%) The Management has given guidance of no equity dilution for the next two years as the current capital is adequate for planned growth. Going forward, CAPF should continue with a strong operating performance. Being a niche player in SME and retail loans (consumer durables, two-wheelers etc), and its asset growth momentum should continue due to a favourable base effect and strong asset quality. Also, the 10 year government bonds, which are a proxy for borrowing costs for NBFC's have come down by 1.50 % from 2014, this has helped in major re rating in terms of Price to Book by up to 1 % in NBFC so lower interest rate cycle would help the company to lower its borrowing cost, which is positive for margins. 
At the current market price of Rs. 675.45, the stock is trading at a PE of 25.87 x FY17E and 19.08 x FY18E respectively. The company can post Earning per share (EPS) of Rs. 26.10 for FY17E and Rs. 35.40 for FY18E. It is expected that with the company’s surplus scenario is likely to continue for the next three years & will keep its growth story intact for the coming quarters also. 

KEY FINANCIALSFY15FY16EFY17EFY18E
SALES ( Crs) 536.00971.901,411.401,849.90
NET PROFIT (₹ Cr)114.00156.90237.90323.40
EPS () 12.6017.2026.1035.40
PE (x)43.2035.6023.5017.30
P/BV (x)3.103.503.102.80
EV/EBITDA (x)14.1013.8011.7010.70
ROE (%) 8.30 9.8013.5016.30
ROCE (%)1.101.401.581.74

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This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible. 

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I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article.
 

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