Capital First has appreciated by 72% since our initiation (on January 2013) and by 116% on a YTD basis led by a strong growth in the balance sheet and improved profitability. While we believe the company will sustain the high rate of growth leading to improved RoE, the current valuation (1.8x FY2017E) has turned closer to that of the bigger NBFCs with better operating metrics.
The company has invested significantly to build newer businesses (two-wheeler loans, consumer durable loans etc), which are growing at a strong pace. Though execution risks persist in these businesses (defaults are relatively higher in these segments), but stringent credit processes and an experienced management team should adequately weather the challenges.
Since the stock has appreciated significantly from our initiation price and its valuation looks fair (1.8x FY2017E BV), we recommend investors to take some profit off the table. The valuation gap with the bigger NBFCs having better operating metrics has narrowed leaving limited room for upside in the near term. We, therefore, revise our rating on the stock to Hold with a revised price target of Rs360, valuing the stock at 2x FY2017E BV.
Capital First may benefit from operating leverage which should bring its RoE closer to that of its peers by FY2018. Hence, from the long-term perspective we are sanguine about the stock.
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