Capri Global Capital (CGCL) (NSE: CGCL, BSE: 531595) earlier known as Money Matter Financial Services (MMFS) was started in 1997 as an NBFC (Non-Banking Financial Company) specialising in debt syndication & debt placement. Promoted by first generation entrepreneur, Mr. Rajesh Sharma, MMFS changed its strategy and started focusing on segments with high growth & yield.
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CMP (16/3/2020) – INR 174.85 |
Market Cap – INR 3,055.23 Cr. |
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Promoters’ Ownership (Dec 2019) – 74.94 % |
P/e – 17.45 |
As of 9MFY20, its AUM is at INR 39.45 billion with MSME (51%), construction finance (26%), housing (22%) and Indirect Lending (1%) being the main business segments. CGCL boasts of 21500+ live accounts across 8 states through a network of 84 branches and serviced by a motivated workforce of over 1500 employees.
Investment Rationale
MSME and housing continues to be key growth drivers: CGCL focuses on under penetrated, fast growing and high yielding segments of first time MSME (Micro Small & Medium Enterprises) and housing borrower in tier II and tier III cities. Several government policies and incentives for MSME are likely to act as tailwinds for future growth. MSME lending backed by 100% secured assets has already grown 5x in 4 years.
Lack of formal avenues for financing is the reason for low penetration from banks. Banks face issues in financing MSMEs due to high NPAs (Non-Performing Assets), high processing times, higher cost and capital challenges. Low servicing cost for NBFC’s enables better penetration than banks as NBFC’s outreach is higher. NBFCs offer higher loan eligibility with shorter turnaround times. CGCL being a focused and aggressive player in this huge unexplored segment is poised to continue its robust growth.
CGCL’s foray into Construction and Housing finance was to capitalise on the Affordable Housing Opportunity. The Government of India had estimated an overall shortfall of ~6.25 crore affordable houses in FY16. Post that, the government aimed to complete ~3 crore houses in rural and ~1 crore house in urban area by FY22 under the Pradhan Mantri Awas Yojana (PMAY). As of March 2019, ~1 crore rural house and ~0.3 crore urban houses are complete. This provides combined total opportunity of ~2.7 crore houses for home financiers such as Capri Global. With a higher presence in tier II & tier III, CGCL is poised to benefit most from these opportunities.
Low Cost Liability Mix: Bank borrowings have historically been the largest source of debt for CGCL and continue to be so. As at 9MFY20, bank borrowings formed ~96.3% of CGCL’s borrowings while recently issued NCDs contributed to the remainder. Higher share of bank borrowings means lower overall cost of borrowing. Over FY19, CGCL has managed to raise ~INR 14bn in net bank borrowings. This is creditable for an NBFC of its size, as the sector and particularly smaller NBFCs have had trouble raising funds. CGCL’s ability to continue to raise bank money will have a significant impact on its growth trajectory.
Aspiring Pan India player: CGCL operated through nine branches in FY15 due to the wholesale nature of business (construction finance) & dependence on direct selling agents (DSAs) for MSME loans. Over FY15-19, the company opened 75 new branches to expand its reach. CGCL also re-strategized its business model by in-house sourcing of loans, venturing into housing finance in 2016 with higher focus on MSME. The management is planning to extend the reach to 250+ branches by 2050. High operational cost due to continuous branch expansion & complete in-house sourcing of loans will be mitigated by breakeven of old branches on the back of higher asset turnover in MSME & housing.
Superior Business Quality:
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% |
FY16 |
FY17 |
FY18 |
FY19 |
9MFY20 |
|
Capital Adequacy Ratio |
79.7 |
53 |
39.3 |
34.5 |
38.5 |
|
Cost – Income |
27 |
44 |
52 |
48 |
39 |
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Net Interest Margins |
14.8 |
11.6 |
9.3 |
9.3 |
9.7 |
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GNPA |
0.88 |
0.98 |
1.68 |
1.69 |
|
|
NNPA |
0.75 |
0.84 |
1.44 |
0.62 |
|
|
RoE |
4 |
5.1 |
6.1 |
10.3 |
11.7 |
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RoA |
3.5 |
3.5 |
2.6 |
3.8 |
4 |
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Coverage Ratio |
36 |
81 |
53 |
64 |
|
|
Spread |
5.1 |
5.6 |
4.9 |
5.7 |
6.2 |
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As on 9MFY20 |
MSME |
Construction Finance |
Housing Finance |
Indirect Lending |
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Ticket Size |
INR 1.5 Million |
INR 80 Million |
INR 1 Million |
|
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Avg. Loan Tenure |
4-6 years |
4-5 years |
7-8 years |
|
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Outreach |
11850+ |
140 |
9500+ |
7 |
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Loan to value/Security Cover |
~48% |
2x |
~60% |
1.1x |
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Portfolio Yield (%) |
16.8 |
18.6 |
14.1 |
15.5 |
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GNPA (%) |
4.59 |
0.16 |
1.98 |
- |
With a comfortable capital adequacy ratio, the company is poised to achieve robust loan growth of 40-50% YoY, as it pedals growth by leveraging on its lending expertise to first time borrower in Tier II & III cities.
The success of CGCL business model is credited to granular secured loan book & strong internal processes like internal loan origination, strong credit underwriting skills & efficient risk management. High rejection rate of 65% demonstrates its strong credit underwriting process & due diligence. This is manifested in superior asset quality as GNPA, NNPA ratio as of FY19 were at 1.69%, 0.62%, respectively. In its endeavour to keep NPA lower, CGCL follows a strategy of disbursing small ticket size loans, which are 100% secured.
Risks and Concerns
Asset quality issues may creep up led by real estate exposure: CGCL’s ~80% of portfolio constitutes MSME & construction finance, which is high yield but also entails higher risk. In the segments of construction finance, CGCL being the sole lender to all its projects attracts higher risk as a slowdown in real estate and directly impacts asset quality. However, during the current liquidity crises, lenders have been vigilant while lending to real estate developers.
MSME growth aligned to economy: Traditionally, MSME lending has been habitually seen as riskier as it is highly prone to shocks & slowdown in the economy. Furthermore, MSME also has a high dependence on debt, which makes them highly levered and prone to default during turbulent times. With CGCL exposure to first time MSME borrowers, any shocks in the economy could highly impact its asset quality.
Inability to manage liquidity risk: Being an NBFC, CGCL cannot remain untouched by the liquidity issues in the system. As it is heavily reliant on bank borrowings (~97%), default by other NBFCs could escalate the crises & shoot up lending rates higher than expectations. This would have a negative impact on their margins and profitability.
As on March 16, 2020 CGCL is trading at a price to book multiple of 2.31. The company comes out as a picture perfect NBFC, present across under-penetrated, fast growing and high yielding segments. Therefore, CGCL commands a premium over its peers due to 1) superior capital position, 2) higher growth in MSME & housing book, 3) comfortable asset quality on back of granular loan, strong underwriting & risk management skills.
Team 3C Capitals
Sources:
