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 FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	536.00	971.90	1,411.40	1,849.90
NET PROFIT (₹ Cr)	114.00	156.90	237.90	323.40
EPS (₹)	12.60	17.20	26.10	35.40
PE (x)	43.20	35.60	23.50	17.30
P/BV (x)	3.10	3.50	3.10	2.80
EV/EBITDA (x)	14.10	13.80	11.70	10.70
ROE (%)	8.30	9.80	13.50	16.30
ROCE (%)	1.10	1.40	1.58	1.74

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