| Summary of Contents STOCK IDEA Capital First
Recommendation: Buy
Price target: Rs260
Current market price: Rs190 Leveraging on its new-found pedigree Key points -
A new beginning: Capital First, the erstwhile Future Capital Holdings, has been acquired by the leading global private equity player, Warburg Pincus, from Pantaloon Retail India (in line with the Future group's strategy to exit its non-core businesses and deleverage the balance sheet of Pantaloon Retail India). As part of the transaction, Capital First's balance sheet has been cleaned up considerably with the assignment of some sticky advances (like the exposure to the Deccan Chronicle group) and the infusion of additional capital of Rs100 crore by Warburg Pincus. The accounting policies are being revised to make them more conservative and reflective of the company's actual performance. -
Shifting gears-moving on to a higher growth trajectory: The existing management headed by V Vaidyanathan (ex CEO and MD of ICICI Prudential Life and credited with building the consumer finance business at ICICI Bank) has a well laid-out strategy to expand in the retail and SME sectors. We see the re-energised management team in a better position to tap the vast opportunity in the high-growth retail product segments like gold loans, loan against property (LAP) and loan against shares (LAS). Moreover, the company is now well capitalised with a high capital adequacy ratio (CAR; total CAR @22.7% and tier-I CAR @18.5%) and the macro environment is likely to turn favourable as the monetary easing through policy rate cuts boosts credit demand in the retail, and small and medium enterprises (SME) segments. Consequently, the management expects to more than double its loan book to over Rs10,000 crore (Rs4,400 crore in Q2FY2013) in the next three years. -
Robust asset quality with improving return ratios: The management's strategy of de-risking the portfolio by expanding the secured retail book coupled with a stringent credit origination and monitoring process will help to sustain the asset quality at the prevailing healthy levels. The company's gross and net non-performing assets (NPAs) were around 0.18% and 0.04% respectively (as of September 2012), the lowest compared with the peer group. The company's provisioning policy is more stringent than the regulatory requirement and hence would not be affected by the 90-day NPA recognition norm proposed by the Reserve Bank of India (RBI). We see scope for expansion in the return ratios (the return on equity [RoE] is expected to improve from 13.1% in FY2012 to 17% in FY2015) led by a robust growth in the earnings and the potential to improve the spreads as the company's funding cost comes down with an upgrade in its credit rating. -
Weak macros and potential sale of Pantaloon Retail's 9% stake are risks: In addition to an unexpected deterioration in the macro-economic environment (its relatively high exposure to the real estate sector through loan against property makes it vulnerable), the potential sale of residual stake held by the Future group (which still has a 9% stake) in the open market could limit the upside in the stock in the near term. -
A potential re-rating candidate-Buy: Capital First currently trades at about 1.2x FY2014E book value which is a significant discount to its peers like Bajaj Finance, Mahindra Financial Services and Shriram City Union Finance. The valuation discount is largely attributed to some legacy issues (higher wholesale lending) and a lower RoE. We believe the change in the ownership, the resolution of the legacy issues, the capital infusion and the ability to aggressively grow its loan book in the retail and SME segments could result in the re-rating of its valuation multiple. We initiate coverage on the company with a Buy recommendation and price target of Rs260 (1.5x the average of FY2014E and FY2015E book values).
SECTOR UPDATE Automobiles In reverse gear Volumes decline post-festive season
The domestic automobile (auto) companies are facing demand challenges after the end of the festive season in November. In December 2012, except for Mahindra and Mahindra (M&M; the automotive segment) and Hero MotoCorp (Hero), most of the auto companies reported a volume decline . On a year-till-date (YTD) basis, there has been a drop in the sales of most auto companies except for Maruti Suzuki (Maruti) and M&M. MHCVs and two-wheelers most affected
While the slowdown is broad-based, the medium and heavy commercial vehicle (MHCV) and two-wheeler segments have been affected the most. MHCV sales have witnessed pressure with a double-digit decline in volumes on a YTD basis. Two-wheeler sales have continued to moderate with the YTD growth slipping to low single digits. FY2013 to end on a weak note, expect recovery in FY2014
Auto volumes are unlikely to recover in Q4FY2013, given the weak sentiment. Auto sales are likely to remain subdued in FY2013. We expect a gradual recovery in FY2014 on the back of an improved economic outlook, improved policy action and softening of the interest rates.
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| | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | | | | | |
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