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Robust FY21 performance; prevailing uncertainties likely to impact H1FY22E

Capri Global Capital (Capri) demonstrated superior execution of its ‘granularization’ strategy in FY21 with the combined share of MSME, affordable housing and IRF increasing to 82% (76% in FY20) and trimming the construction finance (CF) share to 18% vs 24% in FY20. Notably, despite consolidation in the CF book, AUM growth revived sharply in H2FY1 as reflected in full year FY21 settling much higher at 20% YoY. While headline asset quality is better than peers with GNPL / NNPL remaining relatively lower at 3.3%/0.9% respectively, restructuring at 7% in MSME segment disappointed.

While near-term asset quality concerns persist given its high exposure to MSME segment at 52%, Capri’s ample liquidity and strong capital position would help navigate the current challenging times better than peers. The stock rerated sharply over past six months capturing most positives, thus leaving limited scope for rerating. Downgrade to REDUCE (from Hold) with a revised TP of Rs450 (earlier: Rs328), assigning a multiple of 3.7x to FY23E BVPS considering 3.8% RoA in FY23E.

* AUM growth remained robust in FY21; expect similar trend in FY22E but backended. Capri’s AUM grew 20% YoY in FY21, driven by higher growth in focused segments (22.7% in MSME, 140.5% in IRL, and 28.6% in HL). It continued to consolidate the construction finance portfolio (down 9.2% YoY). While the management is likely to remain cautious towards growth in H1FY22, it expects healthy credit growth recovery in the second half. Overall, it expects AUM growth of >25% in FY22, largely driven by focused segments (MSME, HL and IRL). We expect Capri’s comfortable liquidity and capital position (CAR at 37%) to ensure quicker return to normalcy vis-à-vis peers.

* Incremental stress in FY21 was largely led by MSME. Headline asset quality deteriorated in FY21 with reported GNPL increasing to 3.3% vs 2.4% in FY20, largely driven by higher stress in MSME as reflected in segmental GNPA climbing to 5.5% and restructuring portfolio at 7.2% as at Mar’21. Housing and construction finance portfolios showed resiliency with GNPL settling lower at 1.8% and 0.2% respectively. Total NNPL stands at 0.9% and ECL provision coverage on stage-3 assets at 28%, implying risk of higher credit cost in FY22E.

* Focus on cost rationalisation. To improve operational efficiency and productivity, Capri initiated a series of measures such as implementation of hub and spoke model, realigned the branch network, identified discretionary expenses and focused on curtailing them. It also rationalised the headcount, especially in branches where productivity was lower. Going forward, it plans to increase customer reach in a calibrated manner in existing geographies, hence branch expansion will be gradual as per on-ground feedback. Company expects these measures to help reduce the cost ratios on sustainable basis; the ratio was 4.5% in FY20 and shrunk to ~3.6% in FY21.

* Outlook. We expect Capri’s AUM trajectory to remain robust. We derive comfort from its 20% AUM growth in FY20, with RoA/RoE at 3.8%/13.5% in FY23E. However, we believe current valuation of 4.3x FY23E BVPS adequately captures Capri’s industry-leading growth and return ratios. Downgrade to REDUCE from Hold, with a revised TP of Rs450. Key risks: a) stress unfolding higher than expectations, and b) moderation in AUM growth.

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