Capital First Ltd Is A Great Buy At Present: IndiaNivesh

Asset Under Management (AUM) of CFL has grown at 79% CAGR over FY10-14 led by low base. As a strategy to focus on retail segment (which includes Consumer Durable Loans, Two wheeler Loans, Loan against Property, Mortgage, Gold Loans and Small Business Loans), AUM of CFL has gradually moved towards retail from 10% in FY10 to 81% in FY14. As a result wholesale loan book (which includes loans to real estate developers) has come down to 19% from 90% over the same period. We believe CFL is well poised to grow at 25% CAGR over FY14-16E with more focus on retail segment.

…..

Valuation:

CFL’s management has delivered the promises of changing the business strategy which has yielded positive results despite struggling environment for financial services industry. Business mix has completely moved towards safer segments in retail after the new management has taken the charge in FY10 along with significant improvement in credit rating. Further CFL’s strategy of 1) moving out of non profitable business like securities and commodity broking, 2) focus on core business of SME financing and 3) best in class asset quality with higher provisioning than regulatory requirement drives more comfort. We believe company is well positioned to deliver the consistent growth of over 25% in next 2-3 years given its strong business model and increasing penetration. Though return profile of CFL is lower than its closest peer but we believe ROEs are likely improve to double digit by FY16E from current low single digit. Most of the NBFCs are trading at 2.0-2.4x for FY16 ABV and CFL is trading at P/ABV of 1.5x and 1.3x for FY15E and FY16E respectively. Though discount of CFL (currently at an average of ~40%) compared to other NBFCs is likely to narrow down on back of improving return profile yet we are not increasing the targeted multiple and rolling over FY15E multiple to FY16E. Hence we recommend buy on the stock with target price of Rs 257, valuing it at 1.5x FY16E ABV which is much lower than peers valuation of 2.0-2.3x for FY16. Significant deterioration in asset quality, lower asset growth than anticipated and significant correction in property/gold prices remain the risk to our estimates. We intend to come up with detailed initiating coverage on CFL.

Download Capital First Stock Idea By IndiaNivesh