Capturing the MSME opportunity in India

Seizing the emerging opportunities to develop robust million micro, small and medium enterprises (MSMEs), Capital First Ltd (CFL) has emerged as a systemically important Non-Banking Financial Company (NBFC) with comprehensive product suite to meet financial needs of the customers. The company has earned a reputation of catering to segments that are traditionally underserved by the existing financing system.

Seizing the opportunity CFL believes in financing India’s 30 million MSMEs and its emerging middle class with a differentiated model based on new technology platforms. This led the management to convert the existing NBFC, which was into wholesale financing business (90 per cent of the book) in March 2010, into a retail finance institution (85 per cent of book), and expanded operations to 222 locations across the country.

CFL has emerged as a significant player in the retail financial services within five years of launch with its retail loan book crossing Rs 12,764 crore. CFL also got the long-term credit rating upgraded thrice from A+ to AA+ during the same period. Capital adequacy stood at 20 per cent as on Q3 FY16, higher than the regulatory requirement of total capital adequacy ratio (CAR), which is 15 per cent. Profit after Tax (PAT) witnessed a growth of 49 per cent for Q3 FY16 y-o-y. The growth was mainly driven by higher net interest income(NII), which grew 53 per cent to Rs 217.57 crore in Q3 FY16 y-o-y.

Scripting success stories CFL expects to support the growth of MSMEs with debt capital through technology-enabled platforms. As per the research paper brought out by Assocham and PwC, in terms of financial assets, NBFCs have recorded a healthy compounded annual growth rate (CAGR) of 19 per cent over the past few years, comprising 13 per cent of financial assets and is expected to reach nearly 18 per cent by 2018-19.

That said, there exists a large opportunity to finance MSMEs segment as they account for 45 per cent of the industrial output and 40 per cent of the total exports. CFL has given a market return of 179 per cent since January 2013 till May 25, 2016. Investors with long-term horizon can invest in this scrip.

Why Buy 

• CFL’s asset quality is among the best in the Indian financial services industry 
• Total capital of the company has grown consistently and significantly over the years 
• High potential of scalability due to massive opportunity in the MSMEs segment

Watch out For 

• Interest rate and liquidity risk

himali@outlookindia.com