Multibagger Business idea:-
Scripscan:Capital First Ltd
Disclosure:I had 9000rs in my account on last Friday.Bought 44 shares at 209 and then it closed at 204.Intent to buy a lot more in near future.
Note:A great business idea is one where you can make others understand it in few lines.Capital first is all about it.
Company is owned by:Warburg Pincus-Private equity player-40bln USD of AUM.They have had Massive success stories like Havells,Kotak bank,Bharti in past.So capital which is mostly the constraint of the NBFC to grow,will never be a problem here.
MD and CEO:Vembu Vaidyanathan-The same guy whom Kishore Biyani snatched from ICICI bank by offering a 50crs salary.Ya 50crs-much more than anyone else in the country.This MD is one of the main reasons why I bought the shares of the company.He is simply the best.More about him
Business:Provides Mortgage Loans,Gold Loans,Two-Wheeler Loans,Durable Loans,Personal loans etc.Mortgage loans contributes around 70% of the total loan book.Over 80% of the total loan book of 9600crs are of retail.Check their corporate presentation to know everything about them.http://www.capfirst.com/pdfs/investor-relations/Capital%20First%20-%20Corporate%20Presentation%20-%20%20FY14.pdf
It takes a lot of time to have such gigantic loan book.Retails are considered much safer than any other ones.A lot of insurance or mfs or wealth management products can be sold to them which would help capital first in incremental ROA without implementing any capital.
Industry outlook:Generally the well managed NBFC's with their reach and experience manages to grow at 3.5-4 times the GDP.So this companies will easily grow by 20-25% for the next 20-25 years,resulting into huge gains for the shareholders.
Its cost of Funds and NIM:For the NBFC industry as a whole probably well rated NBFCs of the AA or AA+ or may be even A+, they all borrow in the range of about 11.5 to may be 11.75. In case of the company, it is much lesser because of the strong asset quality and capital adequacy over 22 percent, it is just around 10.5%.NIM stands at around 5.5% which the management is confident of sustaining.
NPA:The non-performing assets (NPA) of the company has come down to as low as 0.4 percent on a gross basis and 0.1 percent on a net basis.Infact for the last four years it has remained very stable.Management is confident of maintaining the same in the coming years.
Numbers:Net profit of Capital First rose 193.40% to Rs 44.04 crore in the quarter ended March 2014 as against Rs 15.01 crore during the previous quarter ended March 2013. Sales rose 37.74% to Rs 285.67 crore in the quarter ended March 2014 as against Rs 207.40 crore during the previous quarter ended March 2013.For the full year,net profit declined 47.00% to Rs 36.98 crore in the year ended March 2014 as against Rs 69.77 crore during the previous year ended March 2013. Sales rose 32.69% to Rs 1052.41 crore in the year ended March 2014 as against Rs 793.16 crore during the previous year ended March 2013. Profitability has decreased because of high fixed costs associated with building a retail franchise and change in its accounting policy.
Management's guidance for fy14-15:They expect the company to more than double their profits in the present fiscal.
Other points:Promoters own around 72% stake in the company as on date.The company recently declared a dividend of 2 bucks.
Outlook:Over the last five years its portfolio has changed from wholesale (90%) to retail (81%).Led by mortgage loans to SMEs (LAP),loan book has grown at 100% CAGR over FY10-13.This is a 3-4 years call,so what it would do this year or next year is useless.The operating leverage will take care of it as it gets in the higher scale zone.Present loan book of 9600crs.It aims at 30000crs of loan book by fy19-ROA of 2.5%.Presently its leveraged by 10x probably.Even considering 8x leverage with a ROA of 2.5% gives me ROE of 20%.Anything about over 1.5% ROA and 15% ROE with such a gigantic retail book is incredibly amazing.
Conclusion:How I arrived at the target price:P/BV is the metric applied in valuing NBFC's.Estimating book value is a mean task as equity dilution to maintain CAR is a ritual norm of the NBFC business.Book value is 142 presently.Sharekhan's estimate for fy16 is around 162rs.For fy19,veterans tracking it say would be around 220-230.Multiplying 230 with 3.5x gives me the price of around 800 bucks.You can ask me how I arrived at 3.5x of BV and not more or less?Let me try to the answer it the simplest manner.Say you make a FD somewhere,you get post tax interest of 5.6%.You want that 5.6% safety net too when you are valuing your nbfc stock.So divide the ROE which in this case is 20 by 5.6 to get your P/BV for the stock which comes at 3.5 to have the figure of 800.Gruh finance like traded at 8 P/BV last year, coz of its management and quality.Market has its own unique way of valuing quality companies.Capital first is an amazing company with an equally amazing parent and pedigree,a masterclass for your core long term portfolio.
BTW:People looking for midcap/smallcap positional call professional service may rush a mail at my mail id email@example.com to know more about it.