Launching Micro LAP And Rooftop Solar Loans Will Diversify Future Offerings

Key Takeaways

• Expansion into MSME and gold loans could boost revenue growth due to untapped market potential.
  
• Digital-first strategy and co-lending growth with bank partnerships may improve profitability and enhance net margins.
  
• Expansion into Gold Loans and construction finance, mixed with co-lending reliance and tech investments, poses risks to asset quality, growth, and profitability.

Catalysts

A non-banking financial company, provides financial services in India.

• Capri Global Capital's strategic expansion into underserved and high-growth segments, such as MSME loans and gold loans, positions the company to capitalize on significant untapped market potential. This is likely to impact revenue growth positively.
  
• The launch of new products, such as Micro LAP and rooftop solar loans, enables diversification and potentially higher interest income, which could lead to an increase in earnings.
  
• Investments in technology and a digital-first approach are expected to enhance operational efficiency and customer service, potentially improving cost-income ratios and net margins.
  
• The increase in branch network and focus on operational leverage is expected to improve branch productivity and reduce the cost-income ratio, leading to higher profitability in the coming quarters.
  
• The continued growth in the co-lending segment, particularly with strengthened bank partnerships, is likely to drive higher returns on equity (ROE) and effective liability management, positively impacting net margins and overall earnings.

Capri Global Capital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Capri Global Capital's revenue will grow by 33.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.3% today to 31.0% in 3 years time.
• Analysts expect earnings to reach ₹12.0 billion (and earnings per share of ₹14.59) by about March 2028, up from ₹3.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.3x on those 2028 earnings, down from 35.1x today. This future PE is greater than the current PE for the IN Consumer Finance industry at 17.7x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.47%, as per the Simply Wall St company report.

Capri Global Capital Future Earnings Per Share Growth

Risks

• The company's expansion into the Gold Loan segment, with high growth rates and elevated LTV ratios could expose them to significant risk if gold prices decline, potentially affecting asset quality and increasing credit costs.
  
• The MSME loan book's growth pace has been relatively lower compared to other segments, owing to limited branch expansion. Without rapid expansion, this segment might not contribute substantially to revenue, impacting overall growth.
  
• The co-lending AUM represents 18% of the portfolio and relies heavily on partnerships with banks. Disruption or deterioration of these partnerships or terms could adversely affect liability management and profitability.
  
• The firm's construction finance segment has seen rapid growth, yet historically, such growth has been risky due to cyclicality in the real estate market, which could lead to defaults and impact asset quality, particularly in an economic downturn.
  
• The significant investments in technology signal an implication for cost structure. If these investments do not lead to expected efficiency gains or improved margins, it could lead to elevated cost-income ratios, affecting overall profitability and net margins.

Valuation

• The analysts have a consensus price target of ₹250.0 for Capri Global Capital based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹38.6 billion, earnings will come to ₹12.0 billion, and it would be trading on a PE ratio of 27.3x, assuming you use a discount rate of 16.5%.
• Given the current share price of ₹162.9, the analyst price target of ₹250.0 is 34.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.