Motilal Oswal has retained its buy call on non-banking finance company Capital First with a target price of Rs 925, implying a potential upside of 33 percent as growth prospects appear bullish.
"The stock trades at 2.1x Sep’19 book value per share, which we believe is attractive from a risk-reward perspective, considering more than 25 percent AUM growth and 15 percent return on equity (RoE) in the near-to-medium term. Buy with a target price of Rs 925," the research house said.
Over the past 5-7 years, Capital First has demonstrated its capabilities in incubating and scaling up new businesses from scratch, even in a highly competitive environment. Growth has always been steady in the 20-30 percent range, with a CAGR of 26 percent.
Given the strong performance in first half of FY18, coupled with better-than-expected demand in the festive season, assets under management (AUM) growth in FY18 should comfortably exceed management’s guidance of 23-25 percent and could possibly be north of 30 percent, according to the research firm.
Motilal Oswal expects 28 percent AUM growth, driven by growth of 50 percent in consumer durables (CD) loans and 30 percent in two-wheeler (2W) loans.
Capital First's RoE improved meaningfully from 5 percent in FY14 to 12 percent in FY17. However, it still remains below the levels recorded by many of its listed NBFC peers. Currently, the main segments causing a strain to RoE are CD and new ventures (affordable housing and used car financing).
The non-banking finance company targets a 400-500bp improvement in return on equity (at 16-17 percent) over three years from FY17 levels (12 percent).
"There are three key factors driving this improvement - improving return on equity in the CD financing business; mix shift toward CD and 2W financing segments, which generate higher RoE than LAP (loan against property); and break-even in profitability in the new ventures (affordable housing and used auto financing) over the next 1-2 years," the research house said.
Capital First is a niche play in the retail NBFC space, with a well-diversified loan portfolio. Its business model offers high growth potential with strong profitability, the brokerage house said.
While the company has grown its AUM at a 26 percent CAGR over FY12-17, it has not compromised on asset quality. It maintains a healthy balance sheet, with the gross non-performing loans ratio at 1-1.5 percent over the past five years.
Motilal Oswal expects asset quality to remain stable, as the company is focusing on segments where it has good underwriting experience. However, the return ratios have been sub-optimal, as the company has made significant investments in manpower and technology in CD/2W financing.
CD financing is a long-gestation business, and is just bearing fruit for the company. With time and scale, this business is expected to witness a dramatic improvement in profitability, it feels.
The research house expects its shifting loan mix, improvement in margins and stable asset quality to drive return on assets/return on equity improvement from 1.6/12 percent in FY17 to 1.9/17 percent in FY20.
These estimates do not factor in any capital raise which could be possible over the next 12-18 months, Motilal Oswal said.
At 12:03 hours IST, the stock price was quoting at Rs 699.10, up Rs 0.75, or 0.11 percent on the BSE.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
Find the best of Al News in one place, specially curated for you every weekend.
Stay on top of the latest tech trends and biggest startup news.
