Jefferies upgrade for Capital First to ‘Hold’; PT at Rs 765

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Published: May 12, 2017 4:27:05 AM

CAFL's Q4 profit grew 49% y-o-y (11% beat).

Asset quality remained stable. However, valuation at 2.9x FY18E BV should cap upside potential. Profit grew 49% y-o-y to Rs 708 m.

CAFL’s Q4 profit grew 49% y-o-y (11% beat). We raise our FY 18-19E EPS by 15-24% and upgrade CAFL to ‘hold’. Demonetisation impact on loan growth/ asset quality has been lower than we expected. With headwinds receding, we believe strong loan growth should sustain, which coupled with further NIM expansion and stable credit cost should drive 35% EPS CAGR over FY17-19E.

Asset quality remained stable. However, valuation at 2.9x FY18E BV should cap upside potential. Profit grew 49% y-o-y to Rs 708 m. AUM grew 24% (2% miss), but NIMs were better than expected (24bps beat). Fee income surprised positively.

Cost to income was 50.8% (-85bps y-o-y) below our 51.6% est. Credit cost was stable q-o-q but above our estimate.
AUM grew 24% y-o-y (2% beat). Consumer loan grew 62% and business loan (BL) grew 60% y-o-y despite demonetization. Loans against Property (LAP) grew 8% y-o-y. Strong consumer loan growth should sustain, led by rising penetration. LAP growth would be muted but business loans may continue to drive growth in SME segment. We raise our FY18-19E AUM est.

By 1-4%. NIM on AUM rose to 7.8% (118 bps y-o-y, 50bps q-o-q), due to rising mix of higher yielding loans (consumer, BL), lower funding cost, and recent equity issuance. We expect mix of consumer loans to rise to 30.6% (23% FY17) and of business loan to rise to 23% (17.7% FY17) by FY19, which along with lower funding costs could drive better NIM. We lift our FY18-19E NIM est. by 15-20bps.

GNPA was stable q-o-q at 0.95%. Credit cost was elevated at 3.4% (90bps y-o-y,-9bps q-o-q) vs. our 3.1% estimate. We expect credit costs to stay elevated as mix of higher yielding products rise. Asset quality has been stable despite strong growth and demonetisation, contrary to our earlier concern. While asset quality should be broadly stable, upcoming GST implementation may have some impact on asset quality in its SME book.

We raise our FY18-19E EPS by 15-24% factoring higher AUM, better NIMs, higher fee income and lower costs due to op leverage gains. We forecast RoE to expand to 16.8% by FY19E (13.8% before) from 11.9% in FY17. We roll over PT to June 18 (March 17E). Our revised RI model based PT of Rs 765, implies FY18 P/B of 3x (27x FY18 P/E). Risks: lower NIMs, slower AUM growth and worsening asset quality.

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