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| Summary of Contents | STOCK UPDATE Capital First
Recommendation: Buy
Price target: Rs380
Current market price: Rs336 Valuations turn favourable after recent correction, upgraded to Buy Key points - Capital First's stock price has corrected by nearly 12% from its 52-week high of Rs380, thereby increasing our comfort on the stock's valuation. We had downgraded the stock (report dated 11 November) to Hold rating due to its rich valuation (2x FY2017E BV) and advised taking home some profits. However, after the recent correction the valuation has turned favourable (1.7x FY2017E BV) again for investors to accumulate the stock.
- Fundamentally, we are positive on Capital First. It has been reporting a robust growth in the loan book and profitability which is sustainable in our view due to a smaller base and focus on SME and retail sectors. Given the strong growth in the high-yielding segments (two-wheelers, consumer durables, etc), the margins will sustain at high levels (about 6%). Also, despite the strong growth, the asset quality remains among the best in the system. We expect the earnings to grow at a CAGR of 57% over FY2014-17, supported by a 27% growth in the loan book.
- Given the strong growth outlook, a reputed management team and expectations of a strong recovery in the return rations (RoAs and RoEs) by FY2017 and FY2018. Consequently, we upgrade the rating on the stock to Buy with a price target of Rs380.
VIEWPOINT Tourism Finance Corporation of India
Current market price: Rs57
View: Positive Strong case for re-rating of valuation multiples Key points - Loan book to double by FY2016: Tourism Finance Corporation of India Ltd (TFCI) is the specialised lender in the tourism and hospitality sector having a loan book of ~Rs1,300 crore. According to the management the loan book could expand to ~Rs1,800 crore by FY2015 and Rs2,800 crore by FY2016 implying a growth of ~50% CAGR. The company has sanctioned a pipeline of ~Rs800 crore (includes Rs200 crore of refinancing proposals) and queries on the projects worth ~Rs500 crore can drive the growth in loan book.
- RoEs to improve on increase in leverage: The company's RoEs have remained subdued largely due to a higher capital base (Tier-I CAR of 37%). The loan book to net worth ratio stands at 3x (FY2014)which should increase to 4.5x by FY2016 contributed by a strong growth. We expect the earnings to grow a CAGR of 25% over FY2014-16 which could result in an improvement in RoEs from 13% in FY2014 to 16-17% in FY2016.
- Asset quality remains strong: While the hospitality sector is perceived among the stressed sectors, the company has maintained an healthy asset quality (Gross NPAs of ~0.3% and net NPAs of 0.01%). According to the management the company has a vast experience in appraising projects in tourism and hospitality sectors, and lending is backed by strong collateral (over 2x of loans). In addition ~85% of the loan book is towards the operational project, which increases the comfort.
- Valuations: Improving economic environment, strong focus on tourism sector by the government and likely easing of interest rates augurs well for the sector. In the past few months the stock has appreciated significantly but despite that it trades at a reasonable valuation (0.7x FY2016 book value). Going ahead, strong loan growth and improving RoEs could improve the valuation profile for the company and leaves room for 25-30% upside.
- Key risk: While the company has maintained a healthy asset quality in tough times, any sharp rise in NPAs could affect the valuations.
Global Offshore Services
Current market price: Rs589
View: Positive On a rising tide Key points - The Indian offshore services industry is poised for a re-rating with the Indian government's enhanced focus on increasing domestic oil and gas production (75% import dependency) by leveraging the country's east coast and more in deep waters (21 billion tonne of reserves in onland and shallow water and 7 billion tonne in deep waters).
- In addition to an improving business environment, the increased merger and acquisition (M&A) activity in this space globally and some private equity deals in the domestic market are also resulting in increasing investor interest in the offshore support services space. Globally, after the Tidewater-Troms Offshore deal last year, Halliburton is acquiring Baker Hughes in a mega deal for $38 billion. The deal has been done at an average valuation of $75-80 million per vessel (platform supply vessel).
- In India, Global Offshore Services with its fleet of 11 vessels (platform support vessels and other offshore support services vessels) having an average fleet age of four to five years, is a leading player in the offshore services space. It trades at an EV/EBITDA of 11.6x (on rough estimate) FY2016 and is among the preferred stocks to play the re-rating theme in the offshore services space.
- Risk: First, further weakness in oil prices could limit investments in offshore exploration and subsequently affect business conditions in the near term. Second, the financial performance tends to be inconsistent for offshore companies.
| | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | |
| Regards,
The Sharekhan Research Team |
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