Monday, June 21, 2010

Capital Trust Ltd – Going Grameen

While agreeing with the basic hypothesis that there is a fortune at the bottom of the pyramid, this author has for long felt that the microfinance business in particular, despite it’s undoubted potential, was a bit too risky to warrant investment. Indeed over the course of the last few months, quite a few reports have stressed the burgeoning of NPA’s in the microfinance sector in India, not helped by the growing tendency of the microfinance clientele to take loans from multiple institutions.

Still, when the author came across the recent comment of Mr. R. R. Nair, Chief Executive of LIC Housing Finance, that “about 80% of demand is from the low-income segment, so for long-term sustenance of business growth I think the microfinance business is necessary”, he decided that it justified a closer look at listed microfinance companies in India, with a view to see if any of them warranted investment.

Given the very limited universe of such companies, it was not difficult to do some quick research, and in doing so the author came across the following press release from a company called Capital Trust Ltd (BSE Code : 511505) , which caught his interest :

Synopsis :
Going through the article, and thereafter going through the latest annual report of the company, as well as the company’s website , one finds that :
• The company entered the microfinance business in FY09, and achieved profitability in the very first full year of microfinance operations (FY10).
• Company has a vastly experienced management team & board of directors
• The company focuses on North India, where the microfinance penetration is abysmally low.
• The company currently operates 25 microfinance branches, servicing over 22,000 clients, with total loans outstanding of Rs 12.4 Cr, and enjoys a default rate of under 1%
• Company projects profit of Rs. 3.1 Cr in 2011, giving an EPS of Rs 4 on current equity of Rs 7.5 Cr
• The company aims to have an outstanding loan book of Rs 1373.3 Cr by 31.3.2015, as against the corresponding figure of Rs 12.4 Cr on 31.3.2010. That’s 110 times current loan book, in 5 years time !!
• To meet the funds requirement in keeping with the proposed growth, the company has appointed a New York based investment consultant to initially raise Rs 20 Cr foreign equity and Rs 36 Cr debt .

Risks :
Obviously there are a lot of risks, some of which are :
• Maintaining a low level of NPA’s, particularly with the increasing trend of clients to access loans from multiple agencies simultaneously
• Growing competition
• Ability to raise funds at regular intervals & at reasonable cost
• Government regulations, which might impose higher provisioning, or curtail the gamut of activities of microfinance companies

Recommendation :
The stock quotes in the Rs 65~70 range currently. Assuming the company meets it’s guidance of PAT of 3.1 Cr for the current year, the PE stands at approx 17 times current years projected EPS, which suggests that it is fully priced.
However, if the company can come even close to achieving the sort of growth it has outlined for itself, the stock could well be selling cheap currently. The question is, can it actually deliver ? Can one trust some capital investment in Capital Trust Ltd ?
The answer to that will become evident in the next couple of years. For now, the author suggests actively tracking this firm, and committing capital based on one’s conviction levels.

Author : Bosco Menezes

Recommendation Date : 20.06.2010

Disclaimer/Disclosure :
At the time of writing this article the author has a position in the stock covered by this report. The author or any of his dependent family members may make purchases or sales of the securities mentioned in the report while the report is in circulation. Readers/recipients of this report are strongly advised to do their strict due diligence, and should be aware that the value of investments can go down as well as up. The author shall not be liable for any direct or indirect losses arising from the use of the contents of this report, and readers are therefore cautioned to use the information contained herein at their own risk. In fact, readers would do well to seek the advice of a qualified independent advisor. The author certifies that all of the views expressed in this report accurately reflect his personal views about the subject company at the time of writing this report. Feedback / brickbats may be hurled at the author at .