Buy Capital First; target of Rs 925: Motilal Oswal

Motilal Oswal's research report on Capital First

Capital First’s (CAFL) 1QFY18 PAT grew 37% YoY to INR672m, driven by strong AUM growth, NIM expansion and stable asset quality. AUM grew 24% YoY to INR214b, despite a high base (+36% YoY in 1QFY17). Sequential AUM growth of 8% is encouraging, in our view. Growth was robust across segments, except secured MSME financing, where the company is intentionally slowing down. Consumer durables loan book grew 22% QoQ and 57% YoY to INR31b, now accounting for 15% of total loan book v/s 12% in 1QFY17. Housing finance book also grew by a strong 45% YoY, albeit off a low base. NIM (on AUM) expanded 130bp YoY to 8%, driven by higher yields and lower cost of funds. Yield on AUM at 14% was up 70bp YoY (largely due to changing loan mix in favor of higher-yielding 2W/CD products). Cost of funds fell 40bp YoY to 8.5%. We believe there is further scope for margin expansion with increasing yields and moderating cost of funds. Expense ratio continues to inch upward due to investments in technology, coupled with changing asset mix (2W/CD loans have higher expense ratios compared to LAP). Opex/avg. AUM increased from 4.1% in 1QFY17 to 5.3% in 1QFY18.  Asset quality remained stable. CAFL migrated to 90dpd NPL recognition in the quarter – this added 40bp to the reported NPL. On a 90dpd basis, GNPL ratio remained stable at 1.72% (+7bp QoQ).

Outlook

CAFL is a niche play in the retail NBFC space with a diversified loan portfolio and high growth potential. We believe the return ratios are suppressed due to significant investments in manpower and technology. In addition, its margins were low due to a large share of LAP and heavy reliance on bank funding. We expect significant margin improvement and stable asset quality to drive RoA/RoE improvement from 1.6%/12% in FY17 to 2%/17% in FY20. We keep our estimates largely unchanged. Buy with a TP of INR925 (3.0x FY19E BVPS).