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Foray into gold loan business in FY23; car loan distribution gaining traction

Capri Global Capital (Capri) demonstrated superior execution of its ‘granularisation’ strategy in FY23 with combined share of MSME, gold and affordable housing increasing to 79% (74% in FY22) and trimming construction finance (CF) share to 18% vs 19% in FY22. Notably, car loan business scaled new heights; it disbursed close to Rs60bn car loans in FY23 with branch+ fleet-on-street expanding to 450 by Mar’23 from 213 in Mar’22. During FY23, it forayed into gold financing and expects gold loan AUM to contribute ~25% of consolidated AUM over the next 4-5 years with total branch network of 1,500 in the near term. Considering high yields in gold loans (~18-21%) vs blended yield of 15.2% during Q4FY23, it expects NIM to improve or stabilise going ahead. Overall, with up-fronting gold loan related investment in FY23, likely AUM growth at 30- 35% in FY24 (capital raising of Rs14.4bn via rights to support growth) and stable asset quality, it expects RoE to remain in mid-teens in FY24. The stock rerated sharply over the past six months capturing most positives, thus, leaving limited scope for rerating, in our view. We reinitiate coverage with a REDUCE rating and a TP of Rs695, assigning a multiple of 3.5x to Sep-24E BVPS, considering 2.6% RoA in FY25E.

* FY23 AUM growth remained robust at 56% YoY; expect >30% growth in FY24. Capri’s AUM grew robust 56% YoY in FY23, driven by higher growth in focused segments (50% in HL, 21% in MSME, and scale up in gold loan, launched in Q2FY23). Construction finance portfolio, too, witnessed revival in H2FY23 – as a result, CF book grew 45% in FY23. Going ahead, company gold loan (750 branches), car loan distribution (partners with 8 banks) and housing finance to remain key growth drivers. Overall, it expects AUM growth of 35-40% in FY24. We expect Capri’s comfortable liquidity and capital position (CAR at 40%) to ensure quicker return to normalcy vis-à-vis peers.

* 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 its branch network, identified discretionary expenses and focused on curtailing them. It also rationalised the headcount, especially in branches where productivity was lower. Further, it upfronted set-up cost for gold loan business in FY23 and is now focusing on improving profitability at current GL branch network.

* Focus on cross-sell. Currently, Capri runs three key lending products – gold loans, home loans and MSME with separate branch network. However, currently, it is developing a technology to cross-sell products and make these branches composite (all branches capable of selling all products). The technology is likely to take 6-9 months to stabilise.

* Stress in MSME segment is subsiding; asset quality in housing finance and construction finance remains robust. Headline asset quality improved as reflected in GNPL in MSME segment moderating to 3.4% by Mar’23 from the peak of 4.6% in Jun’22. Similarly, total restructured book in MSME segment fell to Rs0.9bn by Mar’23 from Rs2bn in Mar’21. Housing and construction finance portfolios showed resiliency with GNPL settling lower at 1.2% and 0.3%, respectively. Total NNPL stands at 1.2% and ECL provision coverage on stage-3 assets stands at 31%. Key risks: a) AUM growth exceeding our expectation, and b) higher fee income from car loan distribution and co-lending.

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