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Update On Capri Global Capital Ltd - HDFC Securities
Capri Global Capital (CGCL) is an ostensibly picture perfect NBFC, present across under-penetrated, fast growing and high yielding segments. With an AUM of ~Rs 40bn (45% CAGR over FY 15-19), the co lends to MSMEs (~50% of AUM), small-mid-sized developers (CF, ~27%), home buyers (HF, ~21% of AUM) and other NBFCs (IRL). At present, its operations span 85 branches across 8 states. While reported stress has been trending upwards, current levels are not alarming (GS-III at ~2.3%).
With more than adequate capital (~36%), growing reach and a small base, CGCL appears poised to grow faster in the medium term. CGCL’s ability to raise funds from banks (~95% of borrowings, of which ~80% are from PSBs) over FY19, even as funding for the sector dried up, is commendable given its small size. Funding did become constrained for CGCL in 1QFY20, but the situation has improved and undrawn lines are ~Rs 10bn at present. While spreads (~6.3% over 1HFY20) may sustain, growing opex on a/c of expanding operations, and higher LLPs as the book seasons will weigh down on RoAAs (~3% over FY16-19). Increasing leverage is likely to drive RoAEs.
While there have been past run-ins and there is a lack of institutional holding, we’re not overly skeptical, and we believe that CGCL has business potential. However, current valuations (~2.5x trailing P/ABVs) are rich.
* Evolving and Diversified Book:
MSME financing has been a major driver of growth at CGCL (~45% CAGR over FY15- 19), although its growth has slowed significantly (~12% YoY in 1HFY20). CGCL’s CF book grew at a ~25% CAGR over FY15-19 but dipped ~10% over 1HFY20. HF remains the fastest growing portion of the book at ~65% (2QFY20). The IRL book shrank by ~71% YoY in 1HFY20 to form ~1% of the book. MSME and HF are likely to contribute disproportionately to AUM growth in the near term. Should CGCL continue to access bank funding as it.has over FY19, it will be able to grow faster given its small base and adequate capital. Asset Quality: Reported stress has been trending upwards from FY15 to 2QFY20, with GS-III at ~2.3%. MSME GNPAs expectedly trended upwards, reaching 3.9%. Interestingly, CF has near nil GNPAs (~15bps), in spite of stress faced by the sector. Moratoriums on CF exposures could theoretically result in the manifestation of lumpy stress. We expect impairment ratios to inch up gradually, led by MSME and HF.
* Bank Funding A Positive:
Over 1HFY19, the company completely repaid CPs and raised a net ~Rs 14bn of bank borrowings over FY19. Funding appears to have become constrained in 1QFY20, as evidenced by a dip in disbursals and AUM growth; but the situation appears to have improved since and CGCL has undrawn lines of ~Rs 10bn. PSBs are the largest lenders to the co.
* Nebulous Past:
Interestingly, the lending business was not the co’s maiden venture. CGCL is the erstwhile Money Matters Financial Services Ltd., a debt syndicator. The company ran a successful and profitable debt syndication business till 2011 and had commenced lending in 2010. In 2011, there were some run-ins with the authorities. The parties were subsequently discharged from charges levied.
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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