Capital First’s fourth quarter earnings were slightly ahead of estimates on back of strong balance sheet growth. Asset quality remained stable.

The year-on-year (YoY) asset under management (AUM) growth for the quarter stood at 24 per cent. Retail AUM was up 33.4 per cent YoY. The Q4FY17 YoY net interest margins were up 55 per cent at Rs 476.5 crore versus Rs 305.9 crore and net profit was up 49.05 per cent.

The board has also approved fund raising of Rs 500 crore.

Throwing more light on the earnings and the outlook, V Vaidyanathan, Executive Chairman, Capital First, said although the board has approved fundraising they have no immediate plans to raise capital. It is an enabling resolution.

He is also confident about growth in return on equity from the current levels because operating leverages have now started kicking in.

He is confident of 25 per cent CAGR in the coming years.

Below is the verbatim transcript of the interview:

Q: I first want to talk about this fund raising, is this likely to be via QIP, entire Rs 500 crore or is this just an enabling resolution and if you could give us some timelines?

A: There are no real plans to raise funds immediately. It is only enabling resolution. We are a fast growing company so it is nice to have a resolution in place but there are no real plans to raise equity at this point of time.

Q: What is your capital adequacy now and when are you likely to need capital?

A: Our capital adequacy right now is 20.4 percent. So certainly at this kind of capital adequacy we do not need equity. However, like I said, it is an enabling resolution.

Q: Let us talk about the numbers then because this time around once again it has been a strong showing for you and I also want to talk about how consumer loans have grown, 62 percent growth this time, are you seeing sustainable growth over the next say three to four quarters?

A: We have actually seen that consumer financing as a percentage of our overall portfolio has actually increased in the last year from 25 percent to 33 percent and the SME portfolio is close to about 66 percent. So, clearly we are seeing big action on the consumer space.

We all know that India is highly underpenetrated in the consumption space and that is what we are focusing on.

Q: Can you give us a little more colour on the SME portfolio itself, in Q3 you also saw some niggling payment problems because of the cash crunch, has all that been ironed out?

A: All that is completely digested actually and the Q4 has come back roaring again in growth. Our sense both by anecdotal information or conversation with customers as well as structurally speaking, we think next year the SME sector will be back very strongly.

Our book at this point of time is close to about Rs 20,000 crore, Rs 19,800 crore to be precise which grew from Rs 16,000 crore last year. We think that next year this could grow by anywhere between 23-25 percent.

Q: Take us through what the expectation is going into the next two quarters?

A: We all know that the key sectors that we are playing in are highly under-served. We all know that credit to the SME sector is not more than about 8-9 percent of the real demand. So, we think that for us to grow at about 25 percent even in the coming years should be very possible. That would be a guidance.

Q: It is easily visible that retail side has grown up so much. A word on return on equity, do you think it can grow from here as well?

A: Yes, we are very confident the return on equity will grow from here because the operating leverages are kicking in. We have had considerable scale now, the retail loan book alone has actually grown from Rs 94 crore in 2010 to close to about Rs 18,800 crore today.

So, we think that if that grows to about Rs 22,000-23,000 crore next year, we will have significant operating leverage kicking in and that will translate the return on equity. You should expect it from us.

Q: This rumour refuses to go away that Warburg Pincus wants to sell-off the stake in Capital First. Can you give us some update at all? When I last asked you, you said it was not true?

A: I did mention at that point that they are very committed to the company. They really like what we are building and they would ideally like to see the company flower out over the next four or five years which we think is going to be a really good phase for us.

However, I did mention to you that a stake of maybe 10 percent odd is being speculated is going to be out of the ordinary. After all, they have invested 70 percent and at some point of time they have got to sell, but not in the near future but certainly a 10 percent should be very much on the cards.

Q: We have heard that probably they have already been speaking with Temasek and some arrangement is coming in. Can you confirm?

A: I cannot confirm any specific names.

Q: It is just that if Warburg is wanting to sell and you are going to raise capital then there are a couple of sellers then for shares.

A: Like I said, there is no immediate plans for raising equity. As far as Warburg is concerned, even if they sell a portion of say about 10 percent odd which is what is being speculated about in the newspapers these days, it is just fine because the company moves on, company gets more liquidity, newer partners, stronger partners comes in. So life goes on.

Source: MoneyControl