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Capital First: Growth on expected lines - Views on News from Equitymaster

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Capital First: Growth on expected lines
Mar 17, 2015

Capital First announced its results for the third quarter and first nine months of the financial year 2014-15 (9mFY15). The institution grew its income from operations by 34.4% YoY and the profits by 240% YoY during 9mFY15. Here is the detailed analysis of the results.

Performance summary
  • Income from operations grew 34.4% YoY in 9mFY14 with a healthy 29% YoY growth in loan book. Consequently, the net interest income grew by robust 50.9% YoY.
  • Net interest margins moved down from 9% in 9mFY14 to 8.9% in 9mFY15.
  • Net profit for the first nine months increased by 240% YoY on account of higher net interest income and lower provisioning costs. Other expenses too remained in control, with cost to income ratio at around 60%.
  • Gross NPAs have remained stable at 0.6% while the net NPA ratio is negligible.
  • The capital adequacy ratio of the entity stood comfortable above 20% as at the end of December 2014.

Consolidated financials
Rs (m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Income from operations 2,735 3,789 38.5% 7,740 10,402 34.4%
Interest Expense 1,668 2,046 22.7% 4,736 5,869 23.9%
Net Interest Income 1,067 1,743 63.4% 3,004 4,533 50.9%
Net interest margin (%)       9.0% 8.9%  
Other Income 30 12 -60.0% 76 211 177.6%
Other Expense 746 995 33.4% 2,275 2,814 23.7%
Provisions and contingencies 182 306 68.1% 447 736 64.7%
Profit before tax 169 454 168.6% 358 1,194 233.5%
Tax 68 154 126.5% 130 417 220.8%
Profit after tax/ (loss) 101 300 197.0% 228 777 240.8%
Net profit margin (%) 3.7% 7.9%   2.9% 7.5%  
No. of shares (m)         83.0  
Book value per share (Rs)         145.0  
P/BV (x)*         2.7  
*Book value as on 31st December 2014

What has driven performance in 9mFY15?
  • When we recommended Capital First we had explained that the business model of the company has a striking resemblance to yet another niche NBFC, which has had a very successful run in the past few years and has added tremendous value to both its own business and shareholder returns. The company is none other than Bajaj Finance. It took Bajaj Finance all of 5 years to transform itself from a faltering and ignored entity in the Bajaj Group, to being one of the most sought out one. Like in the case of Bajaj Finance, Capital First's net interest margins (NIMs) are expected to remain above sector average, and be the key to higher profitability.

  • The NBFC's unique focus on the underpenetrated segment of non-salaried borrowers has helped it grow the loan well above sector average. The high growth in loan book (29% YoY) in 9mFY15) filtered into net interest income and net profits as well.

  • The operating expenses continue to fall (down to 60% in 9mFY15 from 74% in 9mFY14) even as the company intends to expand its network and asset base.

  • While the gross NPAs remained stable in 9mFY15, at 0.6%, the net NPAs are marginal at 0.1%.
What to expect?
At the current price of Rs 390, the stock is valued at 2.3 times our estimated FY17 adjusted book value.

As we have said in the past, companies that qualify for the Megatrend opportunity will see a meaningful improvement in their fundamentals over a period of time. It is encouraging to see that Capital First is managing to achieve above average loan growth along with quality of earnings and assets. We had recommended investors to invest around 50% of the amount they intended to invest in the stock, when we recommended it in December 2014.The stock has already gone up by 23% since then. We would recommend investors to wait before buying more of the stock at relatively attractive valuations (closer to the Best Buy price) .

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