Initiating Coverage |
28
July 2017
Sector: Financials
Capital First
Capitalizing on multiple opportunities
Piran Engineer - Research analyst
(Piran.Engineer@MotilalOswal.com); +91 22 3980 4393
Alpesh Mehta - Research analyst
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Capital First
Contents |
Capitalizing on multiple opportunities
Summary ............................................................................................................. 3
Turnaround story ................................................................................................. 5
Diversifying the balance sheet .............................................................................. 7
Huge market opportunity ................................................................................... 11
Significant upside to margins .............................................................................. 15
Asset quality best among peers .......................................................................... 18
SWOT analysis .................................................................................................... 20
Profitability to improve; top-quartile RoE by FY19 ............................................... 21
Bull and Bear case
.............................................................................................. 25
Valuation and view............................................................................................. 26
Key risks ............................................................................................................. 28
Company background ......................................................................................... 29
Financials and valuations .................................................................................... 30
28 July 2017
2

Capital First
Initiating Coverage | Sector: Financials - NBFC
Capital First
Buy
BSE Sensex
32,310
S&P CNX
10,015
CMP: INR766
TP: INR925 (+21%)
Capitalizing on multiple opportunities
Becoming a formidable player in multiple segments
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
12M Avg Val (INR M)
Free float (%)
CAFL IN
97.4
815/ 465
12/3/-12
72.1
1.1
373
64
n
n
Financial Snapshot (INR b)
Y/E March
2017 2018E 2019E
NII
12.3 16.5 21.2
PPP
8.1 11.6 15.1
PAT
2.4
3.2
4.2
EPS (INR)
24.6 33.0 43.3
EPS Gr. (%)
34.2 33.8 31.5
BV/Sh. (INR)
234.4 263.8 303.0
RoA on AUM (%)
1.6
1.8
1.9
RoE (%)
12.0 13.2 15.3
Payout (%)
10.6
9.0
8.0
Valuations
P/E (x)
30.0 22.4 17.1
P/BV (x)
3.2
2.8
2.4
Div. Yield (%)
0.4
0.4
0.5
Shareholding pattern (%)
As On
Jun-17 Mar-17 Jun-16
Promoter
36.0
61.1
65.1
DII
10.9
6.2
7.6
FII
25.7
8.4
7.5
Others
27.4
24.3
19.8
FII Includes depository receipts
n
n
Founded in 2012 via management buyout of an existing NBFC, Capital First (CAFL) is
a non-deposit-taking NBFC focusing largely on retail lending. Over the past six
years, CAFL has transformed itself from a predominantly wholesale financier to a
well-diversified retail financier with impeccable asset quality.
CAFL is a niche play in the retail NBFC space with a diversified loan portfolio. While
secured MSME financing is the largest product in the portfolio, CAFL targets to
increase the share of higher-yielding consumer durables (CD) and two-wheeler (2W)
financing from 13%/10% currently to 16-17% each by FY19. Additionally, the
company has built a large unsecured MSME financing book (18% of total).
Margins are expected to expand significantly (~90bp over FY17-20E), driven by
incremental share of higher-yielding products, combined with declining cost of funds
(CoF). This, coupled with 23% AUM CAGR, should drive 29% NII CAGR over FY17-20.
Over the past few years, CAFL has made significant investments in building new
product segments. With the investment phase now largely behind, the benefits are
expected to accrue over the medium term. We expect RoA/RoE to improve from
1.6%/12% in FY17 to 1.9%/17% in FY20. Against this favorable backdrop, we
initiate coverage on CAFL with a Buy rating and a target price of INR925 (3.0x FY19E
BVPS).
Classic turnaround story
CAFL was founded in 2012 via management buyout of an existing listed NBFC,
which primarily dealt in wholesale financing. Mr Vaidyanathan, the current
chairman, joined the company in 2010. He roped in private equity firm Warburg
Pincus in 2012, which acquired a majority stake in the company. Since then, CAFL
has undergone a major turnaround. The company has diversified the balance
sheet away from wholesale financing, with the share of this segment declining
from 90% in FY10 to 7% now. With new management and shareholders coming
in, significant emphasis was laid on underwriting standards and asset quality,
resulting in a decline in the GNPL ratio from 5%+ to 1% over FY10-17.
Capital First
Capitalizing on multiple
opportunities
Niche play in MSME financing; Growth driven by new product segments
CAFL is a niche play in the retail NBFC space, with MSME financing as a key focus
area. It has been able to score well over banks and other peers due to its better
service, quick TAT and low-to-mid ticket size. The company started CD and 2W
financing in 2010-11. Both these businesses have scaled up well, and CAFL is now
among the largest players in both these segments.
Consequently, management
intends to further increase the combined share of both these segments from
23% to 35% (equally split) by FY19.
At the same time, the company will look to
reduce the share of LAP, which is witnessing intense pricing pressure across
industry. We expect ~40% AUM CAGR in 2W and CD financing to drive 23%
overall AUM CAGR over FY17-20E.
Piran Engineer
+
91 22 3980 4393
Piran.Engineer@motilaloswal.com
Please click here for Video Link
28 July 2017
3

Capital First
Stock Performance (1-year)
Margins on an uptrend led by evolving asset and liability mix
With the gradual loan mix shift toward unsecured MSME, 2W and CD financing,
yields have improved from 14.6% in FY13 to 17.4% in FY17. Management targets to
further increase the share of higher-yielding CD/2W financing from 13%/10%
currently to 16-17% each by FY19 . This should be accompanied by a decline in the
share of low-yielding LAP from 42% currently to 33% by FY19, in our view.
Our
calculation suggests that overall yields can increase by 50bp due to the changing
loan book mix, despite lower incremental yields in LAP. CAFL would be one of the
very few NBFCs under our coverage to exhibit an improvement in yields.
At the
same time, the company should reap significant benefits of lower CoF due to MCLR
cuts by banks and also refinancing of higher-cost maturing NCDs. Consequently, we
expect margins to improve from 7.2% in FY17 to 8.1% in FY20.
Asset quality best among peers
With the change in ownership and management in FY11, the company prioritized
improving asset quality and cleaning the balance sheet. With these actions, the
GNPL ratio declined from 5.3% in FY10 to 0.1% in FY12. Asset quality has remained
benign since then, as company has an aggressive write-off policy. The 0.95% GNPL
ratio in FY17 (at 120 dpd NPA recognition basis) is the best in our NBFC coverage
universe. Importantly, CAFL has been proactive in detecting early warning signals.
The company also maintains healthy provision coverage of 68% on its GNPLs.
30%+ PAT CAGR over FY17-20E
We expect under-penetration in the large business segments, coupled with a focus
on CD/2W financing, to drive AUM CAGR of 23% over FY17-20. The change in AUM
mix is expected to drive yields upward. This, coupled with lower cost of borrowings,
should result in 90bp NIM expansion over FY17-20, in our view. As a result, we
expect robust NII CAGR of 29% over FY17-20. However, we expect the expense ratio
(opex/average AUM) to increase from 4.6% to 4.9% over FY17-20 due to the
changing asset mix (cost structure in CD/2W financing is higher than that in LAP).
Similarly, credit costs should also increase from 2.4% in FY17 to 3.2% in FY20, in our
view. Overall, this should drive RoA/RoE improvement from 1.6%/12% in FY17 to
1.9%/17% by FY20. The expected PAT CAGR of 30%+ over FY17-20E for CAFL would
be one of the highest in our coverage universe.
Improving return ratios, strong growth; Initiating with Buy
CAFL raised INR3.4b via preferential allotment to GIC in December 2016. While its
tier I capital ratio is comfortable at 16%, better-than-expected growth rate would
lead to additional capital requirement in the medium term. With strong AUM CAGR
and improving return ratios over the medium term, we believe the stock is
attractively priced at current valuations. We value the company based on its residual
income model. Assuming Rf of 7.0%, CoE of 14% and a terminal growth rate of 5%,
we initiate coverage with a Buy rating and a target price of INR925, implying 3.0x
FY19E P/B.
28 July 2017
4

Capital First
Turnaround story
Complete business overhaul over past seven years
n
n
n
Mr. Vaidyanthan, Chairman and Managing Director, had a stint with Citibank and ICICI
Group for 10 years each building their complete retail banking portfolio. In 2010, as he
set out to build a retail financing focused Company on his own, he choose the
brownfield option to acquire a stake in an existing NBFC and turn it around.
After acquiring the stake, he changed the business model, exited existing non-core
businesses, launched retail financing products and focused on improving asset quality.
Subsequently, in 2012, Mr Vaidyanathan brought on board Warburg Pincus, which
acquired a majority stake in the company to provide an exit to the erstwhile
promoter. Warbug Pincus also infused INR1b into the company.
With this, the company got a new identity as Capital First and changed its board
composition. Over past seven years, CAFL has undergone a dramatic transformation
from a pure wholesale player to a largely retail-focused player (93% of loan book is
retail). At the same time, GNPL declined from 5%+ in 2010 to 0.95% in FY17.
Mr Vaidyanathan joined the
company in 2010 and
brought on board Warburg
Pincus to invest INR8.1b in
2012
Change in management and ownership
After Mr. Vaidyanathan joined the company, he changed the business model, exited
existing non-core businesses, launched retail financing product, improved asset
quality and roped in fresh talent. Most of the existing core management team joined
between 2010 and 2012. In 2012, to provide an exit to the erstwhile promoters, Mr.
Vaidyanathan acquired the financial backing of Warburg Pincus. As a part of the
transaction, Warburg Pincus invested INR8.1b in the company, of which INR1b was
fresh capital infusion. In the following year, the company raised INR1.78b from
Warburg Pincus (INR1.28b) and HDFC Standard Life (INR0.5b). As the company
continued to grow at a rapid pace, it again raised INR3b via a QIP in FY15, which was
subscribed by marquee investors like Goldman Sachs. In December 2016, the
Company further raised INR 3.4b through preferential allotment to GIC, Singapore.
Share of wholesale loans
declined from 90% in FY10
to 7% in FY17.
Moving toward retail financing
Since the entry of Mr Vaidyanathan, the company has focused on diversifying and
de-risking its balance sheet. It launched SME Loans, consumer durable loans, two
wheeler loans and gold loans (gold loans business was eventually closed in FY15,
though). It also laid more emphasis on unsecured SME loans and cross-selling of
personal loans while it de-emphasized wholesale lending. Since 2015, the Company
also focused on growing its housing loan portfolio through affordable housing loans.
As a result, the loan mix has changed from 90% wholesale and 10% retail in FY10 to
93% retail and 7% wholesale currently. GNPL too has declined from 5%+ to 0.95%,
while profit after tax increased from INR0.5b in FY11 to INR2.4b in FY17.
28 July 2017
5

Capital First
Exhibit 1:
History of the company
Source: MOSL, Company
28 July 2017
6

Capital First
Diversifying the balance sheet
Targeting the urban customer; Scaling back in LAP
n
n
n
Unlike most NBFCs that target rural/semi-urban population, CAFL predominantly
targets the urban population. It has presence across 200+ Tier 1/2 locations.
While LAP has supported the Company’s growth so far, other retail businesses like
consumer durable loans and two wheeler loans have matured and are expected to
contribute a larger share in the overall loan mix going forward.
This diversification should help somewhat de-risk the balance sheet, as there has been
intense competition, pricing pressure and asset quality worries recently in the LAP
industry.
CAFL targets the banked,
urban customer in LAP. Its
niche lies in better
customer service and quick
turnaround time.
Targeting the sweet spot in LAP – urban customer, average ticket size
CAFL is a niche play in the retail NBFC space, with MSME financing as a key focus
area. Its business model offers high growth potential with strong profitability and
moderate competition. Unlike most other NBFCs, the company does not target the
quintessential rural customer. Rather, it focuses on the banked, urban customer in
tier 1/2 geographies. LAP comprises 42% of its overall AUM. Its niche over banks and
other players in MSME financing lies in its better service and quick turnaround time
(all paperwork is done at the borrower’s site, so that s/he does not need to spend
time on travelling). The industry offers loans with ticket size starting from INR0.2m
to INR500m based on the customer segment and risk profile. Capital First focuses on
the low-to-mid section of the ticket size spectrum where the competition is
relatively less considering the perceived risk of the customer. This target customer
segment remains under penetrated by the formal banking system.
Exhibit 2: Major secured MSME financiers among NBFCs and HFCs
Company
Indiabulls
LICHF
DHFL
Shriram City Union
HDFC
Cholamandalam
Bajaj Finance
Capital First
PNBHF
AUM
(INR b)
219
182
141
127
98
96
84
83
75
Geography
Urban
Urban
Rural
Rural
Largely Urban
Largely semi-urban and rural
Largely Urban
Largely urban
Urban
Ticket size
(INR m)
7-8
1-2
4-5
0.8
5
10
8
5
Source: MOSL, Company
Around 70-75% of the loan book comes from northern and western India. The
Company primarily sources 80-85% of these loans through the direct selling agents
(DSAs).
Over past few years, CAFL has also scaled up its unsecured business loan book
sustainably, especially coming from a very small base. The share of the unsecured
business loan book has increased from 1% in 1QFY14 to 18% currently, implying
100%+ loan book CAGR. In this segment, the company offers loans with average
ticket size of INR2m at yields of 18-19%. With this book having scaled up well over
past few years, management expects that the share of unsecured business loans
may remain largely between 20-22% over the medium term.
28 July 2017
7

Capital First
Exhibit 3: SME financing – snapshot
What?
Average ticket size
Sourcing
Geographies
Competitors
Loan tenure
Loan underwriting
Collection
LTV
Collateral
Distribution
Description
v
v
v
v
v
v
v
v
v
v
INR8m for LAP; INR2m for unsecured business loans
Mostly through the direct selling agents and in-house sales team
North and west account for 70-75% of loan book; Pre-dominantly in Tier 1,2 geographies
Smaller banks and NBFCs like Cholamandalam and Bajaj Finance
4-5 years for LAP (on actuarial basis); 3 years for unsecured business loans
In-house and decentralized model
Repayments through ECS & Direct Debit Instruments; Delinquent accounts through in-house dedicated team
45% at origination; Maximum permissible LTV at origination: 65%
Residential or commercial property
200+ locations through DSAs, own sales team
Source: MOSL, Company
Increasing focus on 2W/CD lending
CAFL started consumer durable financing and two-wheeler financing between 2010
and 2011. Both these businesses have scaled up significantly since then, and the
company is among the largest players in each segment.
Tie-ups with over 2,000 2W
dealers; finance 25-30k
vehicles per month
CAFL has created a niche for itself in 2W lending, as it is among the few NBFCs that
are not captive to a particular OEM. Other such NBFCs include Shriram City Union
Finance and L&T Finance. However, SCUF pre-dominantly targets the rural
population and does not have significant presence in urban areas. On the other
hand, CAFL mostly targets the self-employed segment in urban areas, unlike banks
which largely chase the salaried segment. As a result, the company is again in the
sweet spot, where competition is moderate and opportunities are immense. CAFL
has a tie-up with over 2,000 dealers across the country for origination of two
wheeler loans.
CD financing is primarily a two-player market. Bajaj Finance is the leader, but CAFL is
fast catching up and has now garnered an estimated 25% market share in this
segment. Similar to Bajaj Finance, the company offers interest-free CD loans to
customers and earns yields via subvention from the manufacturer. The company is
present in more than 200 locations across the country. With a robust technology
platform (which helps it conduct a thorough borrower profile assessment and credit
bureau check), CAFL is able to provide credit decision instantly once the customer
data is fed in the system. Its technology platform also enables rigorous
underwriting, as evidenced by the excellent asset quality enjoyed by the company.
~25% market share in
consumer durables
financing
28 July 2017
8

Capital First
Exhibit 4: 2W financing – snapshot
What?
Geographies
Dealer network
Loan tenure
Underwriting
Collection
Customer segment
Description
v
v
v
v
v
v
North & West (70-75%)
2,000 dealers across the country
2-3 years
Automated; Sanctioning at dealer location coupled with physical verifications and checks
Repayments through ECS & Direct Debit Instruments; Delinquent accounts enabled by
Communication through SMS/Email/Call Center through a mix of In-house and Outsourced resources
65% self-employed customers in urban and semi-urban areas
Source: MOSL, Company
Exhibit 5: Consumer durables financing – snapshot
What?
Geographies
Dealer network
Tenure
Underwriting
Collection
Customer segment
Description
v
v
v
v
v
v
Pan-India, largely North and West
5,000+
8-12 months
Automated; Sanctioning at point of purchase
Repayments through ECS & Direct Debit Instruments; Delinquent accounts enabled by
Communication through SMS/Email/Call Center through a mix of In-house and Outsourced resources
Good balance of salaried and self-employed individual customers in urban and semi-urban areas
Source: MOSL, Company
Over past three years, CAFL has focused on these two segments, resulting in the
share of CD financing increasing from 4% to 13% and that of 2W financing from 5%
to 10%. Management targets to increase the share of each of these segments to 16-
17% each by FY19.
Home loans, largely for
affordable housing, is a
nascent but fast growing
business for CAFL
Home loans – nascent but growing business
CAFL also offers affordable home loans, primarily to the self-employed segment,
through its wholly owned subsidiary, Capital First Home Finance Ltd. Average ticket
size is INR1-1.5m, and the loan book stands at INR8b. Sourcing is done primarily
through in-house resources. Capital First started focusing on this segment from
FY15-16 and it is now expected to grow at a 50%+ CAGR over next two years. As a
result, its share in the overall loan book is expected to increase from 4% currently to
8% by FY19.
Wholesale business on the decline
Although the erstwhile business model focused on wholesale credit, primarily on
real estate developer financing, since the entry of Mr Vaidyanathan, the company
has lowered its focus on this segment. Consequently, the share of wholesale
financing has declined from 90% in FY10 to 7% currently, and is expected to decline
even further over the medium term. The Company completely de-focused real
estate financing and this portion of the book is coming down sharply. The Company
also provides other corporate loans on selective basis.
28 July 2017
9

Capital First
We expect 23% AUM CAGR
over FY17-20, with a decline
in the share of LAP
Exhibit 6: AUM growth chart
AUM (INR b)
29
21
24
34
24
24
24
23
Growth (%)
62
FY12
75
FY13
97
FY14
120
FY15
160
FY16
198
FY17
245
FY18E
305
FY19E
375
FY20E
Source: MOSL, Company
Exhibit 7: Segment-wise AUM mix
LAP
19
5
4
5
55
Unsecured MSME
16
7
6
8
56
Consumer
14
9
10
13
48
7
10
13
18
42
FY17
2W
Home Loans
5
12
16
19
37
FY18E
Others
4
14
18
19
33
FY19E
Wholesale
3
15
19
20
31
FY20E
FY14
FY15
FY16
Source: MOSL, Company
28 July 2017
10

Capital First
Huge market opportunity
MSME sector lacks sufficient access to formal financing
n
n
n
In India, ~36m micro, small & medium Enterprises (MSMEs) contribute ~45% of
manufacturing output and 8% of GDP.
MSMEs are credit-starved, despite total banking sector credit of INR8t to the sector.
IFC-Intellecap estimates total credit shortfall of INR26t for the MSME sector.
MSMEs usually lack documents required for credit appraisals. This, along with higher
credit costs, makes it difficult for banks to lend to this segment.
MSME sector, a critical cog in India’s growth machinery
MSME sector is critical to
the economy, with a
contribution of over 45% of
total manufacturing output
The MSME sector is critical part of India’s growth machinery, with ~36m enterprises
across different industries employing over 80m people in 2012-13. In addition, the
MSME sector accounts for ~45% of total manufacturing output and contributes well
over 8% of India’s GDP. With the government’s impetus on manufacturing to create
jobs and revive economic growth in the country, we expect the MSME sector to
grow at above GDP growth rate over the medium term.
Exhibit 8: Definition of MSME
Category/
Manufacturing
Services
Initial investment in plant & machinery (in INR m)
Micro
Small
<2.5
2.5-50
<1
1-20
Medium
50-100
20-50
Source: MSMED Act, IFC, MOSL
IFC estimates INR19t credit funding shortfall for MSMEs
Total capital requirement
for MSME segment is
estimated at INR26t, of
which INR19t is debt gap
Total bank credit to the MSME sector grew at a CAGR of +25% to INR7.9t over FY05-
14. Yet, the MSME sector is severely credit-starved. According to a report by IFC-
Intellecap, total finance requirement of the MSME sector is estimated at INR32.5t,
of which debt requirement stands at INR26t. Hence, there is a huge shortfall of
credit provided by banks to the MSME segment. This shortfall is addressed by NBFCs
as well as other informal sources such as local moneylenders, family & friends and
chit funds. The IFC estimates that formal sources cater to only 22% of total MSME
debt financing.
Exhibit 9: Overall finance gap in MSME sector (INR t)
4.6
7.0
32.5
27.9
20.9
19.0
1.9
Total finance
demand
Entrepreneur's
contribution
Potential finance
demand
Formal supply
Total finance gap
Total debt gap
Total equity gap
Source: MOSL, IFC-Intellicap report, ‘Providing venture debt to the MSME Sector in India’, 2012
28 July 2017
11

Capital First
Banks focus more on
higher-ticket-size loans
Higher costs and difficulty in credit appraisal limit bank lending…
Commercial banks usually find it difficult to service the MSME segment due to the
smaller ticket size, the lack of formal documents, irregularity of cash flows and
recovery (which are generally outsourced by banks) cost. Furthermore, banks follow
a standardized credit appraisal process and rely heavily on documentary evidences
to assess credit worthiness of borrowers. However, most MSME business owners,
especially the smaller ones, find it difficult to provide such documents as most of
their transactions are still cash-based. Thus, banks prefer to focus on relatively high-
ticket loans, where credit appraisal is much easier and transaction costs are lower.
…presenting significant lending opportunity for NBFCs
NBFCs are typically well suited for businesses requiring low-ticket-size financing,
given their ability to service customers with repeated interactions, high levels of
staffing and flexibility in terms of appraisal norms and loan repayment terms. Banks
prefer large-ticket loans as they lack low-cost large ‘feet on the street’. Also, banks
prefer traditional methods of loan appraisal (requiring stringent documentation)
and repayment terms.
The untapped addressable finance demand in the micro enterprises segment
presents a huge opportunity for NBFCs, especially those having the necessary
workforce and infrastructure to service this demand profitably.
2W penetration in India is
lower than peers
India – the second largest 2W market, but financing penetration low
India is the second largest 2W market in the world after China, with sales of over
15m vehicles every year. However, compared to other countries with similar or even
higher per capita income, 2W penetration in India stands lower – countries like
Malaysia have 3x penetration than that of India.
Exhibit 10: Further scope to increase 2W penetration in India
332
No. of 2-wheelers per 1,000 persons
127
108
96
75
75
Malaysia
Sri Lanka
Italy
India
Brazil
China
Source: MOSL, data.gov.in
28 July 2017
12

Capital First
The 2W industry is generally considered a proxy for the rural economy. Over past
few years, sales of 2Ws have been muted due to the sluggish rural and agrarian
economy. Over FY12-17, the industry recorded a mere 6% volume CAGR. However,
with the improving outlook of the rural economy driven by the government’s thrust
on infrastructure development, we expect 10% sales CAGR over FY17-20E.
Exhibit 11: 2W sales growth expected to pick up
14
Domestic 2W sales (mn)
Growth (%)
12
10
7
3
13.4
FY12
13.8
FY13
14.8
FY14
16.0
FY15
8
3
16.5
FY16
17.6
FY17
19.0
FY18E
21.3
FY19E
23.4
FY20E
Source: MOSL
7
8
Finance penetration for
2Ws have been within the
range of 25% - 35%
Finance penetration of 2W has traditionally remained stagnant between 25%- 35%
in India depending on the year. This trend is expected to continue over the medium
term as well.
Rising per capita income and growing aspirations of people have helped the
consumer electronics business to grow significantly over the past decade. However,
penetration of most ‘white goods’ in India is significantly lower than that in
developed markets. According to a report by Ernst and Young (link
to report),
the
consumer electronics market is expected to grow to USD29b by FY20 from USD10b
in FY14. In addition, there are only two established players in the CD financing
segment – Bajaj Finance and Capital First. Both these players account for 20-25% of
the overall market (BAF: 15-20%, Capital First: 5%). We believe that there is
significant scope to increase penetration in this segment, as the value proposition is
unparalleled – the customer does not bear any cost (barring a small one-time fee)
and the loan sanctioning happens in a span of a few minutes. This also incentivizes
the customer to purchase higher-ticket-size products. Additionally, the share of
organized retail in India stands at less than 5%. With the implementation of GST and
the gradual shift from unorganized to organized trade, we expect organized retail to
gain market share. This would be beneficial for players like CAFL which operate out
of organized retail centers.
Aspirational middle-class supports growth in consumer durables
28 July 2017
13

Capital First
With lower penetration of
consumer durable goods in
India v/s developed
countries, growth is
expected to remain strong
over the medium-to-long
term
Exhibit 12: Indian market size (INR b)
Source: MOSL, E&Y report
Exhibit 13: Market penetration – India v/s global average
Source: MOSL, E&Y report
28 July 2017
14

Capital First
Significant upside to margins
Changing asset mix, along with lower cost of funds, to improve margins
n
n
n
CAFL is gradually moving away from being just an SME lender to becoming a
diversified, multi-product, high-yielding retail lender.
It targets to increase the share of higher-yielding CD/2W financing from 13%/10%
currently to 16-17% each by FY19. This should be accompanied by a decline in the
share of low-yielding LAP, from 42% currently to 33% by FY19.
The company should also reap significant benefits in terms of cost of funds, given i) a
drastic reduction in MCLR by banks and ii) refinancing of maturing market borrowings
at lower cost.
We expect ~50bp
improvement in yields over
FY17-19 driven by increased
share of unsecured
products
Changing loan book mix to improve yields
Over past four years, the company has introduced and scaled-up new products such
as unsecured MSME financing and CD/2W loans. The share of unsecured MSME
financing has increased from 1% in 1QFY14 to 18% currently, while that of CD (3% to
13%) and 2W (3% to 10%) financing has also inched up. Consequently, the share of
secured MSME financing (LAP) declined from 55% in 1QFY14 to 42% in 4QFY17. The
share of wholesale lending too has declined from 24% to 7% over the same time
period (wholesale lending is a de-focused segment anyway).
Exhibit 14: Trend in AUM mix (%)
LAP
18
13
5
5
5
54
16
12
6
5
6
55
Unsecured MSME
16
10
7
6
7
55
16
8
7
6
8
56
15
7
7
8
9
53
Consumer Loans
14
7
8
8
10
53
15
6
8
10
11
50
2W
14
7
9
10
13
48
Others
11
7
9
12
13
47
10
8
9
11
16
45
Wholesale
9
9
10
12
17
43
7
10
10
13
18
42
Source: MOSL, Company
With increase in the share of higher-yielding CD and 2W portfolio, we expect 50bp
improvement in overall yields over the next two years, despite incremental yield
pressure in LAP.
CAFL would be one of the few NBFCs under our coverage, wherein
we expect an improvement in yields over the medium term.
28 July 2017
15

Capital First
Exhibit 15: Yield on loans to improve significantly (%)
15.3
FY12
14.6
FY13
15.6
FY14
16.4
FY15
15.8
FY16
17.4
FY17
17.7
FY18E
17.9
FY19E
18.1
FY20E
Source: MOSL, Company
With the change in its asset mix, the loan book composition will look as follows:
Loan mix of CAFL will
resemble that of BAF by
FY19, in our view
Exhibit 16: Comparison of BAF and CFL (FY19E)
Loan book mix (FY19E, %)
LAP + Unsecured MSME
Consumer financing (incl. 2W)
Others
Bajaj Finance
45
35
20
Capital First
53
32
16
Source: MOSL, Company
Reducing reliance on bank borrowings
The company has traditionally raised bulk of its funding from banks, despite AA+
rating by CARE. The share of bank borrowings ranged from 75-85% up to FY16.
However, with a sharp reduction in G-sec yields and a corresponding drop in cost of
market borrowings in FY17, CAFL has started raising more money via CPs and NCDs.
Consequently, the share of bank borrowings dropped from 75% in FY16 to 58% in
FY17, while that of market borrowings increased from 25% to 42%.
Share of bank borrowings
decreased from 75% to 58%
over FY17
Exhibit 17: Share of bank borrowings declined sharply over FY15-17 (%)
Bank borrowings (%)
15
15
Market borrowings (%)
25
42
85
85
75
58
FY14
FY15
FY16
FY17
Source: MOSL, Company
The company has witnessed rating upgrades from A+ in FY11 to AA+ in FY13 and
maintained it since then. Recently, it has been upgraded to AAA by Brickworks. The
Company has been able to raise funds at competitive rates from the market. CAFL
counts marquee domestic and international organizations like International Finance
Corporation among its bond investors. Management intends to continue raising bulk
of its incremental funds from the debt capital market, reducing its dependence on
banks. As a result, it targets to reduce the share of bank borrowings to 40% by FY19.
28 July 2017
16

Capital First
We expect the company to reap significant benefits on cost of funds from i) a drastic
reduction in MCLR by banks (Capital First has 95% of its bank borrowings at MCLR)
b) refinancing of high-cost maturing NCDs.
Higher yields due to the changing asset mix, coupled with the decline in cost of
borrowings, will help improve margins by 90bp over FY17-20, in our view.
Exhibit 18: Cost of borrowings (%)
Exhibit 19: NIM on AUM (%)
11.3
FY12
9.1
FY13
8.8
FY14
9.3
FY15
8.8
FY16
8.9
8.4
8.3
8.3
5.1
FY12
4.0
FY13
3.9
FY14
4.8
FY15
5.8
FY16
7.2
7.8
8.0
8.1
FY17 FY18E FY19E FY20E
Source: Company, MOSL
FY17 FY18E FY19E FY20E
Source: Company, MOSL
28 July 2017
17

Capital First
Asset quality best among peers
GNPL ratio declined from 5%+ in FY10 to 1% now; Healthy capitalization
n
n
n
With the change in ownership and management of the company in FY11, the top
priority was to improve asset quality and clean the balance sheet. CAFL also took a
provision hit on its investments in subsidiaries as it planned to exit non-core
businesses.
With these actions, the GNPL ratio declined from 5.3% in FY10 to 0.1% in FY12. Asset
quality has remained benign since then, and stood at 0.95% in FY17. The company also
maintains healthy provision coverage of 68% on its GNPLs.
CAFL recently raised INR3.4b via preferential share allotment to GIC. With 16% Tier I
capital, we believe the company is well-capitalized to support growth.
GNPL ratio of 1% is lowest
in our NBFC coverage
universe; however, credit
costs are higher than some
peers.
Significant improvement in asset quality
When Mr Vaidyanathan took charge of the company in FY11, the company faced
legacy asset quality issues. Its GNPL ratio stood at over 5% as 90% of the loan book
was wholesale. Management devised a plan to de-emphasize the wholesale lending
book and focus more on retail products. The company also took a provision hit on its
investments in subsidiaries, as it planned to exit the non-core businesses. As a
result, its GNPL ratio declined from 5.3% in FY10 to 0.1% in FY12, and has remained
benign since then. With a GNPL ratio of 0.95% currently, CAFL enjoys best asset
quality among all NBFCs under our coverage. However, the company follows a
prudent provisioning policy and also write-offs loans as and when recovery is
doubtful. As a result, credit costs are higher than that of some peers.
Exhibit 21: GNPL ratio – FY17 (%)
PCR (%)
82
6.7
68
49
4.7
1.7
7.7
9.0
Exhibit 20: Asset quality trend
GNPL ratio (%)
100
75
90
75
3.7
FY10
0.3
FY11
0.1
FY12
0.1
FY13
0.4
FY14
0.7
FY15
1.1
FY16
0.9
FY17
1.0
CAFL
BAF
CIFC
SCUF
LTFH
MMFS
Source: Company, MOSL; Migrated to 120/90dpd in FY16/17
Source: Company, MOSL; Note: Only CIFC is at 90dpd
Exhibit 22: Credit cost (on AUM, %)
Exhibit 23: FY17 credit costs v/s peers
4.3
3.0
4.5
2.4
1.6
1.0
0.3
0.3
0.3
0.5
0.9
1.7
2.4
3.0
3.1
3.2
CIFC
BAF
CAFL
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Source: Company, MOSL
MMFS
SCUF
LTFH
Source: Company, MOSL; LTFH credit costs are for rural segment
28 July 2017
18

Capital First
Since the change in management and the restructuring of the company in FY11,
CAFL has raised capital a number of times. It received fresh infusion of INR1b from
Warburg Pincus in FY13, and INR1.28b and INR0.5b from Warburg Pincus and HDFC
Standard Life Insurance, respectively, in FY14. It also did a QIP amounting to INR3b
in FY15, with Goldman Sachs as one of the largest investors. In December 2016, it
raised INR3.4b via preferential share allotment to GIC taking the Tier I ratio of 16%.
However, given the strong growth expected over the medium term, we believe the
company may look to raise capital over the near-to-medium term.
Exhibit 24: Healthy Tier I ratio – FY17 (%)
22.3
16.0
15.2
14.2
13.6
13.2
SCUF
CAFL
SHTF
BAF
CIFC
MMFS
Source: Company, MOSL
28 July 2017
19

Capital First
SWOT analysis
n
n
n
Presence in high-yield, high-growth business
segments
Targeting the banked urban customer
Best-in-class asset quality
Strength
n
n
Weaknesses
n
n
n
n
Operates in cyclical businesses, which are
directly dependent on the performance of the
economy but Company has necessary systems
and checks to cover that
Businesses dependent on technology and
innovation and company needs to keep on
investing on technology
Operates in underpenetrated business segments
with huge growth potential
Negligible presence in south and east India
Huge opportunity to scale up in affordable
housing finance for the self-employed segment
Primarily urban model, opportunities in Tier3/
Tier 4 locations
Opportunities
n
n
n
Threats
n
CFL operates in high-yielding retail finance, which
could attract stiff competition
SFBs have access to lower cost of funds, which could
result in price competition
Increase in share of unsecured business loans and
consumer durables loans could impact asset quality
Changes in regulatory guidelines could impact
business parameters
28 July 2017
20

Capital First
Profitability to improve; Top-quartile RoE by FY20
30%+ PAT CAGR over FY17-20; RoE to improve to 17% by FY20
n
n
n
Under-penetration in the large business segments, coupled with a focus on CD/2W
financing, will drive AUM CAGR of 23% over FY17-20E, in our view.
The change in AUM mix is likely to drive yields upward. This, coupled with lower cost
of borrowings, should result in 90bp NIM expansion over FY17-20E. As a result, we
expect robust NII CAGR of 29% over the same period.
CAFL is expected to incur slightly elevated opex due to a change in the loan mix. Asset
quality is expected to remain largely stable. As a result, return ratios should improve
significantly, going forward. RoA /RoE are expected to increase from 1.6%/12% in FY16
to 1.9%/16.7% by FY19.
Loan growth to be driven by
CD, 2W and home loan
segments
23% AUM CAGR over FY17-20, despite scale-back in LAP
Due to intension competition, pricing pressure as well as perceived asset quality
worries by the industry at large, CAFL has been growing its LAP book cautiously over
the past few quarters. While the book grew 15-20% up to FY16, the company has
scaled back slightly in this segment and grew only 9% in FY17. We expect growth in
this segment to continue to remain muted over the near-to-medium term. On the
other hand, the company is focusing on growing the 2W/CD financing book. We
expect these segments to be the key growth drivers over the medium term.
We expect under-penetration in the large business segments, coupled with a focus
on CD/2W financing, to drive AUM CAGR of 23% over FY17-20E.
Exhibit 25: AUM growth trend
AUM (INR b)
29
21
24
34
24
24
24
23
Growth (%)
62
FY12
75
FY13
97
FY14
120
FY15
160
FY16
198
FY17
245
FY18E
305
FY19E
375
FY20E
Source: MOSL, Company
Exhibit 26: Segment-wise AUM mix – share of LAP will continue to decline
LAP
19
5
4
5
55
Unsecured MSME
16
7
6
8
56
Consumer
14
9
10
13
48
2W
7
10
13
18
42
FY17
Home Loans
5
12
16
19
37
FY18E
Others
4
14
18
19
33
FY19E
Wholesale
3
15
19
20
31
FY20E
FY14
FY15
FY16
Source: MOSL, Company
28 July 2017
21

Capital First
90bp margin expansion to
drive 29% NII CAGR over
FY17-20
29% NII CAGR over FY17-20, driven by 90bp margin improvement
CAFL is well poised to reap significant benefits on the margins front over next two
years due to a) mix shift from low-yielding LAP to higher-yielding 2W/CD financing
and b) significant benefits in terms of cost of funds due to MCLR cuts and
refinancing of high-cost borrowings. With the margin benefit in place, coupled with
23% AUM CAGR, we expect NII CAGR of 29% over FY17-20. CAFL is better placed in
terms of expected NII CAGR over FY17-20 in our NBFC coverage universe.
Exhibit 28: NII CAGR (FY17-20E)
Growth (%)
58
35.2
33.2
Exhibit 27: Revenue growth trend
NII (INR b)
57
56
29.0
18.6
15.3
15.0
34
21
3.3
FY14
5.2
FY15
8.1
FY16
12.8
FY17
17.2
FY18E
28
26
12.3
22.0
FY19E
27.6
FY20E
BHAFIN
BAF
CAFL
SCUF
MMFS
MUTH
STF
Source: Company, MOSL
Source: Company, MOSL
Expense ratio will increase
marginally due to shift
towards 2W/CD financing
Expense ratio to increase marginally due to changing asset mix
Over past few years, CAFL has incurred elevated costs due to investments in
technology and high loan origination costs. Investments in technology were
primarily toward the 2W/CD segments, where sophisticated technology is necessary
for instant credit bureau checks and application scorecard generation. The Company
would continue to invest in technology and innovation which would help the growth
of retail financing business growth. However, loan recovery costs will increase with a
higher share of 2W/CD lending. With the overall asset mix changing towards 2W and
CD lending, which are higher-cost segments, we expect opex-to-average AUM to
increase from 4.6% in FY17 to 4.9% in FY20.
Exhibit 30: Opex/avg AUM to tick up
Opex/Avg AUM (%)
C/I ratio (%)
5.0
3.8
3.6
3.5
3.6
3.6
Opex/Avg AUM (%)
4.6
4.8
4.9
4.9
Exhibit 29: Trend in opex ratios
C/I ratio (%)
3.7
4.1
3.2
3.5
4.1
4.7
4.6
49.2
51.1
50.6
51.6
49.4
52.9
49.2
50.8
50
75
73
59
51
51
48
47
46
Source: Company, MOSL
Source: Company, MOSL; Started amortizing fee and securitization
income in FY13, hence spike to C/I ratio
28 July 2017
22

Capital First
We expect an increase in
credit costs driven by higher
share of 2W and CD
financing segments
Asset quality pristine but credit costs to rise
While the erstwhile company faced legacy asset quality issues, when Mr
Vaidyanathan took charge, the focus was solely on improving asset quality.
Management decided to run-off the wholesale lending book and focus more on
retail products. Consequently, its GNPL ratio declined from 5.3% in FY10 to 0.1% in
FY12, and has remained benign since then. With a GNPL ratio of 0.95% currently,
CAFL enjoys best asset quality among all NBFCs under our coverage. We appreciate
management’s proactive stance in keeping a cautious view on LAP. We expect asset
quality to remain stable over the medium term. However, given the increasing share
of CD and 2W loans, we expect credit costs to increase, as these are generally
higher-delinquency products.
Exhibit 32: GNPL ratio – FY17 (%)
PCR (%)
68
62
66
68
4.7
6.7
7.7
9.0
Exhibit 31: Asset quality trend
90
GNPL ratio (%)
82
75
49
0.1
FY13
0.4
FY14
0.7
FY15
1.1
FY16
0.9
FY17
1.4
FY18E
1.6
FY19E
1.8
FY20E
1.0
CAFL
1.7
BAF
CIFC
SCUF
LTFH
MMFS
Source: Company, MOSL
Source: Company, MOSL; Note: Only CIFC is at 90dpd
Exhibit 33: Credit cost (% of AUM) should increase
0.3
FY11
0.3
FY12
0.3
FY13
0.5
FY14
0.9
FY15
1.7
FY16
2.4
FY17
3.0
FY18E
3.1
FY19E
3.2
FY20E
Source: MOSL, Company
30%+ PAT CAGR over FY17-20; RoE to improve to 17% by FY20
Since 2011, the Company has been in a build-up phase which required significant
investments in the technology, manpower and distribution channels. As the
operations are yet to scale up to its full potential, CAFL has had less return ratios
compared to its peers who have much higher vintage in the industry. Its RoA has
largely been in the range of 1-1.5% and RoE in the range of 8-12%. However, we
expect the company to break out of this range over next 2-3 years. With strong AUM
growth coupled with an improvement in margins, RoA/RoE is expected to reach
1.9%/17% by FY20. As a result, we expect 31% PAT CAGR over FY17-20E.
28 July 2017
23

Capital First
Exhibit 34: Return ratios set to improve
RoA (%)
RoE (%)
13
15
17
Exhibit 35: Strong profit growth ahead
PAT (INR b)
89
50
43
34
31
27
Growth (%)
12
8
6
1.1
FY13
0.7
FY14
1.1
FY15
1.4
FY16
1.6
FY17
8
10
-34
1.8
FY18E
1.9
FY19E
1.9
FY20E
0.7
FY13
-16
0.6
FY14
1.1
FY15
1.7
FY16
2.4
FY17
3.2
FY18E
4.2
FY19E
5.3
FY20E
Source: MOSL, Company
Source: MOSL, Company
28 July 2017
24

Capital First
Bull & Bear case
Bull Case
þ
þ
þ
þ
þ
þ
In our bull case, we assume a strong AUM CAGR of 28% (vs. base case of 23%).
We believe improvement in the LAP segment could surprise on the upside.
We expect margins to improve to 9.7% by FY20 v/s 9.1% in the base case
We expect significant cost control, with cost-to-income ratio declining to 43% by
FY20 (v/s 47% in base case)
Asset quality would remain stable with GNPA of 1.0% by FY20 (v/s 1.8% in base
case).
This results in a PAT CAGR of 43% (vs. 31% in base case) over FY17-20 with
RoA/RoE in FY20 equal to 2.3%/21%
Based on the above assumptions, our bull case target multiple is 3.5x FY19 BV,
implying an upside of 48%.
Bear Case
þ
In our bear case, we assume an AUM CAGR of 18% (vs. base case of 23%).
Slowdown in CD financing segment could lead to such a scenario.
þ
We expect margins to increase to 9.0% by FY20 v/s 9.1% in the base case.
þ
We expect cost-to-income ratio to remain largely stable at 50-51% over FY17-20
(v/s 47% in base case)
þ
Asset quality would worsen with GNPA of 2.1% by FY20 (v/s 1.8% in base case).
þ
This results in a PAT CAGR of 16% (vs. 31% in base case) over FY17-20 with
RoA/RoE in FY20 equal to 1.6%/13%
þ
Based on the above assumptions, our bear case target multiple is 2.0x FY19 BV,
implying a downside of 21%.
37:
Exhibit 36:
Scenario Analysis – Bull Case
Bull Case
Net Interest Income
Opex
Provisions
PBT
PAT
NIM – IEA (%)
RoA (%)
RoE (%)
EPS
BV
Target multiple
Target price (INR)
Upside
FY18E
16,731
10,671
6,513
5,261
3,532
8.9
1.9
14.5
36.3
267
3.5
1,095
48%
FY19E
22,394
13,454
8,956
7,378
4,955
9.3
2.1
17.6
50.9
313
FY20E
29,686
16,672
11,889
10,347
6,948
9.7
2.3
20.6
71.3
378
38:
Exhibit 37:
Scenario Analysis – Bear Case
Bear Case
Net Interest Income
Opex
Provisions
PBT
PAT
NIM – IEA (%)
RoA (%)
RoE (%)
EPS
BV
Target multiple
Target price (INR)
Upside
FY18E
15,599
10,406
6,416
4,489
3,015
8.7
1.7
12.5
30.9
262
2.0
583
-21%
FY19E
18,545
12,945
8,229
4,765
3,200
8.8
1.6
11.9
32.8
292
FY20E
21,842
15,597
9,858
5,608
3,766
9.0
1.6
12.5
38.7
327
Source: Company, MOSL
Source: Company, MOSL
28 July 2017
25

Capital First
Valuation and view
Strong earnings growth and RoE improvement to drive re-rating
n
n
n
CAFL is a niche play in the retail NBFC space with a diversified loan portfolio. Its
business model offers high growth potential with strong profitability and low
competition.
While the company has grown its AUM at 26% CAGR over FY12-17, it has not
compromised on asset quality. Its asset quality remains pristine, with the GNPL ratio
at ~1% over past five years. We expect asset quality to remain stable, as the company
is focusing on segments where it has good underwriting knowledge.
We believe the return ratios have been suppressed as CAFL has made significant
investments in manpower and technology in all its retail and SME business segments.
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 1.9%/17% in FY20. We initiate
coverage with a Buy rating, valuing the stock at INR925, implying 3x FY19E P/B.
CAFL is a niche play in the retail NBFC space, with MSME financing as a key focus
area. Its business model offers high growth potential with strong profitability and
moderate competition. While the company has traditionally been a LAP player, over
the years, it has also honed its underwriting skills in 2W/CD financing. The segments
it operates in are largely underpenetrated and have huge growth potential. At the
same time, huge investment requirement in manpower and technology, low ticket
sizes, short loan duration and the need to maintain strong relationships with
manufacturers/dealers create huge entry barriers in this business.
While the company has grown its AUM at 26% CAGR over FY12-17, it has not
compromised on asset quality. Its asset quality remains pristine, with the GNPL ratio
at ~1% over past five years. However, return ratios have been suppressed, as CAFL
has made significant investments in manpower and technology all its retail and SME
business segments. In addition, its margins were low due to a large share of LAP and
higher funding cost. We expect margins improvement, moderate expense growth
and stable asset quality to drive RoA/RoE improvement from 1.6%/12% in FY17 to
1.9%/17% in FY20.We value the company based on an RI model, assuming Rf of
7.0%, CoE of 14% and terminal growth rate of 5%. We initiate coverage with a
Buy
rating, valuing the stock at INR925, implying 3x FY19E P/B.
Exhibit 38: CAFL P/B chart (1 yr forward)
4.0
3.0
2.0
1.0
0.0
1.7
P/B (x)
5 Yrs Avg(x)
2.7
Exhibit 39: BAF P/B chart (1 yr forward)
8.0
6.0
4.0
2.0
0.0
3.0x
P/B (x)
5 Yrs Avg(x)
6.7
Source: MOSL, Company
Source: MOSL, Company
28 July 2017
26

Capital First
Exhibit 40: SCUF P/B chart (1 yr forward)
3.5
2.7
1.9
1.1
0.3
P/B (x)
5 Yrs Avg(x)
2.7
2.2
4.0
3.0
2.0
1.0
0.0
1.8
1.9
Exhibit 41: SHTF P/B chart (1 yr forward)
P/B (x)
5 Yrs Avg(x)
Source: MOSL, Company
Source: MOSL, Company
Exhibit 42: BHAFIN P/B chart (1 yr forward)
10.0
7.0
4.0
1.0
3.3
3.6
P/B (x)
5 Yrs Avg(x)
Exhibit 43: MMFS P/B chart (1 yr forward)
3.5
2.9
2.3
1.7
1.1
0.5
P/B (x)
2.5
5 Yrs Avg(x)
2.8
Source: MOSL, Company
Source: MOSL, Company
28 July 2017
27

Capital First
Key risks
Stringent credit appraisal is the key
CAFL’s borrowers are primarily self-employed. Their earnings are volatile and closely
linked to the local economy. Accurate credit appraisals and managing recoveries are
the key to maintaining asset quality.
Competition from other NBFCs/SFBs in small enterprise loans
Given attractive yields in the small enterprise loans segment, other NBFCs,
especially SFBs, could get aggressive in this segment. SFBs will have access to lower
cost of funds, which could potentially lead to price competition. This would have a
big impact on margins and, in turn, on return ratios. Further, to maintain market
share, the focus toward stringent credit appraisals might get diverted, leading to
elevated level of NPAs.
Increased competition from NBFCs and banks in 2W/CD financing
The 2W loan space, where only 30% of vehicles are purchased on credit, presents
major business opportunities for banks as well as captive financing arms of 2W
manufacturers. The CD financing market is a two-player market that presents strong
growth opportunity with robust profitability. These two segments could attract
more players into the market.
Strong growth in unsecured lending could pose asset quality risks
Over past two years, the unsecured MSME lending book has almost quadrupled
from INR9.6b to INR35b. Similarly, the CD financing book has grown from INR7b to
INR26b. We believe that there could be a possibility of asset quality issues in the
future due to the unsecured nature of lending.
28 July 2017
28

Capital First
Company background
n
n
n
n
n
n
n
CAFL is a non-deposit-taking NBFC focusing largely on retail lending. It offers
loans to small and medium business enterprises, 2W/CD loans, and also home
loans via its subsidiary Capital First Home Finance.
In August 2010, Mr Vaidyanathan, with more than two decades experience in
retail banking acquired a stake in an existing wholesale focused NBFC with a
strategy to transform the Company to a retail financing focused franchise with
the help of financial backup from a private equity investor to provide exit to the
erstwhile promoters.
In FY11, CAFL divested its entire stake in a 50:50 JV with Centrum Capital. In
FY12, it merged an existing subsidiary NBFC (engaged in retail finance) with the
parent company.
In FY13, Cloverdell Investment Ltd. (Warburg Pincus) – through a combination of
(1) purchase of equity shares from existing shareholders and (2) the issue of
fresh equity shares and fresh compulsorily convertible preference shares –
acquired a controlling stake in the company by infusing fresh equity capital of
INR1b.
In May 2013, the company’s 100% owned subsidiary, Capital First Home Finance
Private Limited, obtained a certificate of registration from the National Housing
Bank to commence housing finance business.
In 2015, the company raised equity capital of INR3b via a QIP from marquee
investors such as Goldman Sachs Asset Management.
CAFL recently raised INR3.4b via preferential share allotment to GIC.
Exhibit 44: Board of Directors
Name
Mr. V. Vaidyanathan
Mr. N.C. Singhal
Mr. Vishal Mahadevia
Mr. M.S. Sundara Rajan
Mr. Hemang Raja
Dr. Brinda Jagirdar
Mr. Dinesh Kanabar
Mr. Narendra Ostawal
Mr. Apul Nayyar
Mr. Nihal Desai
Designation
Chairman & Managing Director
Independent Director
Non-Executive Director
Independent Director
Independent Director
Independent Director
Independent Director
Non-Executive Director
Executive Director
Executive Director
Brief Profile
Previously MD & CEO of ICICI Prudential Life Insurance and Executive Director
on the Board of ICICI Bank. 25+ years of corporate work experience.
Founding Vice Chairman & Managing Director of SCICI Ltd (merged with ICICI
Ltd). 56 years of experience in the corporate sector
Currently, Managing Director and Co-Head, Warburg Pincus India. Over 22
years of experience in the corporate sector.
Former Chairman & Managing Director of Indian Bank. Over 40 years of work
experience in the Banking industry.
Former Managing Director and Head-India, Credit Suisse Private Equity, and
also MD & CEO of IL&FS Investsmart Ltd. 35+ years of work experience
Former Chief Economist of SBI with over 35 years of experience in the Banking
industry
Current CEO of Dhruva Advisors and former CEO of KPMG, India. Over 25
years of experience in the corporate sector
Managing Director of Warburg Pincus India. Around 15 years of experience in
consulting and private equity.
Executive Director with more than 20 years of work experience. Previously
worked in leadership positions at IIFL, Merrill Lynch and Citigroup.
Executive Director with over 22 years of work experience in the corporate
sector. Previously worked in key positions at ICICI Bank and Serco
Source: MOSL, Company
28 July 2017
29

Capital First
Financials and valuations
Income Statement
Y/E MARCH
Interest Income
Interest Expended
Net Interest Income
Change (%)
Other Operating Income
Other Income
Net Income
Change (%)
Operating Expenses
Operating Income
Change (%)
Provisions and W/Offs
PBT
Tax
Tax Rate (%)
PAT
Change (%)
Proposed Dividend
Balance Sheet
Y/E MARCH
Capital
Reserves & Surplus
Net Worth
Borrowings
Change (%)
Total Liabilities
Investments
Change (%)
Advances
Change (%)
Net Fixed Assets
Other assets
Total Assets
E: MOSL Estimates
2013
7,284
4,833
2,451
56.6
719
83
3,254
-6.0
2,452
802
-54.0
218
584
99
17.0
698
-34.1
128
2014
9,748
6,467
3,282
33.9
782
95
4,158
27.8
3,022
1,136
41.7
489
648
58
9.0
590
-15.5
165
2015
12,892
7,878
5,014
52.8
1,352
175
6,541
57.3
3,862
2,679
135.8
1,052
1,627
511
31.4
1,117
89.4
200
2016
16,678
8,972
7,705
53.7
2,145
66
9,916
51.6
5,028
4,888
82.5
2,364
2,524
848
33.6
1,676
50.1
219
2017
23,888
11,606
12,282
59.4
3,841
280
16,403
65.4
8,298
8,104
65.8
4,530
3,575
1,174
32.8
2,401
43.3
253
2018E
29,843
13,332
16,511
34.4
5,377
336
22,224
35.5
10,671
11,553
42.6
6,770
4,783
1,571
32.8
3,212
33.8
289
(INR Million)
2019E
2020E
37,725
47,260
16,564
20,617
21,161
26,642
28.2
25.9
6,990
8,738
403
484
28,555
35,864
28.5
25.6
13,454
16,672
15,101
19,192
30.7
27.1
8,813
11,233
6,288
7,959
2,066
2,615
32.8
32.8
4,223
5,345
31.5
26.6
338
374
(INR Million)
2019E
2020E
974
974
28,544
33,440
29,518
34,414
222,781
274,021
26.3
23.0
252,299
308,434
3,725
4,470
20.0
20.0
234,173
288,033
25.0
23.0
666
676
13,735
15,256
252,299
308,434
2013
704
8,903
9,607
62,301
42.0
71,909
11
-99.7
55,303
24.7
391
16,204
71,909
2014
820
10,898
11,719
84,220
35.2
95,938
3,474
31,281.3
69,657
26.0
340
22,466
95,938
2015
910
14,828
15,738
84,374
0.2
100,112
1,942
-44.1
87,089
25.0
191
10,890
100,112
2016
912
16,123
17,035
119,549
41.7
136,584
1,836
-5.4
124,455
42.9
292
10,000
136,584
2017
974
21,862
22,836
141,081
18.0
163,917
2,587
40.9
149,871
20.4
646
11,016
164,119
2018E
974
24,726
25,701
176,351
25.0
202,052
3,104
20.0
187,338
25.0
656
10,953
202,052
28 July 2017
30

Capital First
Financials and valuations
Ratios
Y/E MARCH
Spreads Analysis (%)
Yield on Advances
Cost of borrowings
Interest Spread
NIM
NIM – AUM
Profitability Ratios (%)
RoE
RoA
RoA on AUM
Int. Expended/Int.Earned
Secur. Inc./Net Income
Efficiency Ratios (%)
Op. Exps./Net Income
Empl. Cost/Op. Exps.
Asset-Liability Profile (%)
Loans/Borrowings Ratio
Net NPAs to Adv.**
CAR
Tier 1
Valuation
Book Value (INR)
Price-BV (x)
Adjusted BV (INR)
Price-ABV (x)
EPS (INR)
EPS Growth (%)
Price-Earnings (x)
Dividend per Share (INR)
Dividend Yield (%)
E: MOSL Estimates
2013
14.6
9.1
5.5
4.9
4.0
2014
15.6
8.8
6.8
5.3
3.9
2015
16.4
9.3
7.1
6.4
4.8
2016
15.8
8.8
7.0
7.3
5.8
2017E
17.4
8.9
8.5
9.0
7.2
2018E
17.7
8.4
9.3
9.8
7.8
2019E
17.9
8.3
9.6
10.0
8.0
2020E
18.1
8.3
9.8
10.2
8.1
7.8
1.1
1.0
66.3
22.1
5.5
0.7
0.7
66.3
18.8
8.1
1.1
1.0
61.1
20.7
10.2
1.4
1.2
53.8
21.6
12.0
1.6
1.3
48.6
23.4
13.2
1.8
1.4
44.7
24.2
15.3
1.9
1.5
43.9
24.5
16.7
1.9
1.6
43.6
24.4
75.4
53.3
72.7
42.0
59.0
35.2
50.7
35.2
50.6
28.8
48.0
28.7
47.1
28.5
46.5
27.6
88.8
0.0
23.5
16.3
82.7
0.1
22.2
16.3
103.2
0.2
23.4
18.8
104.1
0.5
19.8
14.5
106.2
0.3
20.3
16.0
106.2
0.5
17.9
14.4
105.1
0.5
16.0
13.2
105.1
0.6
14.8
12.5
136
136.4
9.9
-39.6
1.8
143
143
7.2
-27.5
2.0
173
172
12.3
70.8
2.2
187
184
18.4
49.6
2.4
234
3.2
233
3.2
24.6
34.2
30.0
2.6
0.4
264
2.8
260
2.8
33.0
33.8
22.4
3.0
0.4
303
2.4
298
2.5
43.3
31.5
17.1
3.5
0.5
353
2.1
347
2.1
54.9
26.6
13.5
3.8
0.5
**
the Net NPA numbers from 2013 to 2015 are at 180 dpd NPA recognition norm, in 2016 at 150 dpd NPA recognition norm, in 2017 at
120 dpd NPA recognition norm. The Projections for FY18 to FY20 have also been done at the current NPA recognition norm levels.
28 July 2017
31

REPORT GALLERY
RECENT INITIATING COVERAGE REPORTS
Rs

Capital First
NOTES
28 July 2017
33

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Capital First
NOTES
Disclosure of Interest Statement
Analyst ownership of the stock
Capital First
No
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28 July 2017
34