MOSL: Morning India (30/November/17)- 1. Capital First (Grinding along); 2. Auto (Retails momentum mixed for 2W, CV; PV healthy)

​MOrning India (30/November/17): 1. Capital First (Grinding along); 2. Auto (Retails momentum mixed for 2W, CV; PV healthy)

Today’s top research idea

Capital First: Grinding along; Return ratios to improve with scale and mix

• We met management of Capital First at our 'Midcap Conference'.
  
• Given the strong performance in 1HFY18, coupled with better-than-expected demand in the festive season, AUM growth in FY18 should comfortably exceed management's guidance of 23-25% and could possibly be north of 30%, in our view.
  
• Management targets a 400-500bp improvement in RoE over three years from FY17 levels (12%). There are three key factors driving this improvement: (1) Improving RoE in CD financing. (2) Mix shift toward CD and 2W financing, which generate higher RoE than LAP. (3) Break-even in profitability in the new ventures (affordable housing and used auto financing) over the next 1-2 years.
  
• We expect RoA/RoE of 1.9%/17% in FY20. The stock trades at 2.1x Sep'19E BVPS, which we believe is attractive from a risk-reward perspective, considering 25%+ AUM growth and 15%+ RoE in the near-to-medium term. Buy with a TP of INR925 (2.8x Sep'19E BVPS).
  

Piping hot news

M&M to hike stake in financial services arm, invest Rs 1,055 crore

• Mahindra & Mahindra today said it will increase holding in its arm Mahindra & Mahindra Financial Services Ltd (MMFSL) to 53.25 per cent through acquisition of 2.5 crore shares for a cash consideration of Rs 1,055 crore. The company has agreed to subscribe 2.5 crore equity shares of Rs 2 each of MMFSL at a premium of Rs 420 per share on a preferential basis, Mahindra & Mahindra (M&M) said in a BSE filing.