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Capital First: Improvement in profit margins - Views on News from Equitymaster
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Capital First: Improvement in profit margins
May 16, 2015

Capital First announced its results for the fourth quarter and financial year 2014-15 (FY15). The institution grew its income from operations by 34.4% YoY and the profits by 116.9% YoY during FY15. Here is the detailed analysis of the results.

Performance summary
  • Income from operations grew 34.4% YoY in FY14 with a healthy 26% YoY growth in loan book. Consequently, the net interest income grew by robust 54% YoY.
  • Net interest margins moved marginally lower from 9% in FY14 to 8.9% in FY15.
  • Net profit for FY15 increased by 116.9% 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%.
  • The net profit margin went up from 5% in FY14 to 8% in FY15.
  • Gross NPAs have remained stable at 0.69% while the net NPA ratio was at 0.17% in March 2015.
  • The capital adequacy ratio of the entity stood comfortable above 23.5% as at the end of March 2015.

Consolidated financials
Rs (m) 4QFY14 4QFY15 Change FY14 FY15 Change
Income from operations 2,858 3,842 34.4% 10,599 14,244 34.4%
Interest Expense 1,732 2,008 15.9% 6,468 7,878 21.8%
Net Interest Income 1,126 1,834 62.9% 4,131 6,366 54.1%
Net interest margin (%)       9.0% 8.9%  
Other Income 30 10   106 221 108.5%
Other Expense 862 1,056 22.5% 3,137 3,870 23.4%
Provisions and contingencies 62 318 412.9% 509 1,054 107.1%
Profit before tax 232 470 102.5% 591 1,663 181.4%
Tax (66) 103 -256.1% 64 520 712.5%
Profit after tax/ (loss) 298 367 23.1% 527 1,143 116.9%
Net profit margin (%) 10.4% 9.5%   5.0% 8.0%  
No. of shares (m)         90.9  
Book value per share (Rs)         173.1  
P/BV (x)*         2.3  
*Book value as on 31st March 2015

What has driven performance in FY15?
  • Capital First reported strong growth in the SME and retail finance segments in FY15. The company has consistently increased the share of retail and SME financing from 10% in FY10 to 84% in FY15. Since there are about 29 m SMEs in India employing about 69 m people, the opportunities in SME and retail segment remain huge.

  • 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 (26% YoY in FY15) filtered into net interest income and net profits as well. The number of customers financed from inception till March 2015 crossed 1.1 million.

  • The operating expenses continue to fall (down to 60% in FY15 from 74% in FY14) even as the company intends to expand its network and asset base.CFL had employee base of 1,070 at the end of March 2015.

  • While the gross NPAs remained stable in 9mFY15, at 0.6%, the net NPAs are marginal at 0.1%.

  • The company raised Rs 3 bn of equity capital through a QIP issue in FY15.
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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INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group.

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An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

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