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Chairman Message to Shareholders - 2018

We are proud that over the last eight years, we have built a Company ground up with greenfield research,developed a deep understanding of the consumer, and gained in valuable experience across credit cycles.


It is a great pleasure and privilege to share with you the performance highlights of FY 2017-18 and outline the strategic direction of our journey going ahead. Capital First continued to grow strongly across all parameters in FY 2017-18. 

  • The AUM has grown 36% from 19,824 Crore (US$ 3.05 billion) to 26,997 Crore (US$ 4.15 billion).
  • The NII has grown 53% from 1,301 Crore (US$ 200 million) to 1,987 Crore (US$ 306 million).
  • Fee & Other Income grew 30% from 339 Crore (US$ 52 million) to 443 Crore (US$ 68 million).
  • The Total Income has grown 48% from 1,640 Crore (US$ 252 million) to 2,430 Crore (US$ 374 million).
  • The PAT has grown 37% from 239 Crore (US$ 37 million) to 327 Crore (US$ 50 million).

We are proud that over the last eight years, we have built a Company ground up with greenfield research, developed a deep understanding of the consumer, and gained invaluable experience across credit cycles. We have built a strong professional and value-driven institution with great corporate governance and are ready to capitalize on the new opportunities in the Indian Financial Services space.

The CAGR growth for Capital First since inception are off the charts. A Five Year CAGR is more representative of the latest trends, and shows a strong compounding performance at the Company. Between FY13 and FY18:

  • The AUM has grown at a Five Year CAGR of 29% from 7,510 Crore (US$ 1.16 billion) to 26,997 Crore (US$ 4.15 billion) 
  • The NII has grown at a Five Year CAGR of 48% from 280 Crore (US$ 43 million) to 1,987 Crore (US$ 306 million) 
  • The Total Income has grown at a Five Year CAGR of 47% from 358 Crore (US$ 55 million) to 2,430 Crore (US$ 374 million) 
  • The PAT has grown at a Five Year CAGR of 39% from 63 Crore (US$ 10 million) to 327 Crore (US$ 50 million)

 We are particularly happy to share with you that the Company has maintained high asset quality consistently over its lifetime. We are happy to report that our Gross and Net NPA remained continuously low at around 1.7% and 1% (90 DPD) respectively for the entire period indicating the quality of the underlying portfolio. In fact our portfolio has been stress tested in periods of tight liquidity conditions (FY 2010-14, build-up stage of Company), high inflation (~8-10%, FY 2010-14, build-up stage), declining GDP growth (quarterly GDP growth reduced from 9% to 4.5% FY 2010-14), demonetisation (FY16) and GST (FY17). During all these events, our portfolio quality remained stable.

Usually, retail portfolios take about 4-5 years of seasoning to reflect the true quality. Statistically and analytically speaking, our portfolio has seasoned appropriately and we see no reason why such asset quality will not be maintained in the future. In fact, we expect asset quality to only improve in the years to come. We never availed of the temporary NPA reporting dispensations the RBI offered during such macro changes. The robust credit culture, credit underwriting, and monitoring systems that we set up along the way was important in this achievement. We comfortably migrated to the 90 DPD NPA recognition norm smoothly without any adverse impact.

We also continuously improved Return on Equity. Our return on equity increased from 4.93% in FY13, to 8.33% in FY14, to 10.14% in FY16, to 11.93% in FY17, and 13.31% in FY18 despite investments in businesses during the period. In fact, when seen on a quarterly basis, our return on equity continuously increased from 2.28% in Q1FY14 to close to 15% in Q4FY18. We are confident of crossing 18%-20% ROE soon which would be among the best in the industry. We have a strong potential for a steady future growth. A large consumer and MSME financing company growing upwards of 25% with a high return on equity and excellent corporate governance is incredibly valuable and we are proud to have built such an entity.

We have built a strong and motivated organisation that is greatly committed to our cause. As a result of such transformation, the market capitalisation of Capital First consistently rose since the Management Buyout from 781 Crore (US$ 120 million) on March 31, 2012, to 1,152 Crore (US$ 177 million) on March 31, 2013, to 1,478 Crore (US$ 227 million) on March 31, 2014, to 3,634 Crore (US$ 559 million) on March 31, 2015, to 3,937 Crore (US$ 606 million) on March 31, 2016, and to 7,628 Crore (US$ 1,174 million) on March 31, 2017, 8,000 Crore (US$ 1,231 million) in January 2018, representing a CAGR of 60%, and a 10-fold increase in market cap in under six years.

Post the announcement of the merger of Capital First with IDFC Bank, we recognize that the market cap reduced to 6,118 crore (US$ 941 million) as of March 31, 2018. Investors have many questions on their mind as they anticipate too many challenges. Some are obvious, and some may come up along the way. I don’t deny these challenges. But, I believe we can deal with them. We are extremely excited as we have a unique opportunity to create a leading universal bank with a strong retail presence. We can create a bank that is technologically sophisticated, profitable and most importantly, will be of great service to the society.

To understand the evolving model post-merger, picture Capital First, as a large, dynamic, entrepreneurial company with a phenomenal lending machine, growing upwards of 25%, excellent asset quality, a diversified loan book, high return on equity, and large opportunities in India. Now place this model on a banking platform with even lower funding cost and perennial source of retail borrowings. Now, couple this model with the numerous strengths that IDFC Bank brings to the table, and together we can create a highly successful bank over time.

A banking platform provides two significant benefits: the funding cost is lowered, and more importantly, the source of funds becomes diversified and effectively perennial. The other benefit is the product range we can offer to our customers, such as Credit Cards, Overdraft Facility, Letters of Credit, Bank Guarantees, Salary Accounts and the like increase meaningfully. The possibilities are endless.

It has always been my dream to create a bank that will finance millions of small entrepreneurs, and touch the lives of millions of people in a positive way. Now we have the ability to do that on a large platform.

When I read the reports that India will be a US$ 5 trillion economy by FY25, or that consumption in India will double to US$ 3 trillion by FY25, or that investment spending will be on the scale 3X to US$ 1.8 trillion by FY25, I get inspired. When I read about the growth in airports, rural electrification, affordable housing, formalisation, digitisation and such initiatives, I get inspired. I believe an unbelievable era of prosperity lies before us. 

Now a note to the employees reading this report. To those of you who read or think about challenges we will face, I would like to point out to you that we are our own inspiration. When we started Capital First, we had every challenge lined up against us. Our Company was in its infancy. Our gross NPA was 5.28%, our net NPA was 3.78%, banks’ funding lines were choked for a variety of reasons. The Company had posted losses of 28.75 Crore (US$ 4.42 million) in FY08 and 32.11 Crore (US$ 4.93 million) in FY09. In fact, the Company had to pledge its physical property to raise loans. Funds were being raised at 14.5%. In addition to this, between FY 2010-14, the economy was slowing down, inflation was rising, interest rates were rising, and liquidity was tightening. But we came through it as all of you worked harder. We built the business brick by brick, with diligence and ethics, and the results are there for all to see.

Compared to our last round, on this occasion, growth will be on a banking platform with fund-raising capabilities, favourable macroeconomic conditions and an evolved and already profitable model that has been honed over the years. We have a growing ecosystem, a fast-growing economy, a transformative government, and a supportive regulator.

I believe everything is achievable with the right spirit, hard work, energy, commitment, honesty, the right platform and the right strategy.

If there is one thing I would like you to be swayed by, it is the incredible opportunities ahead. Growth is life, and with growth, everyone will have great opportunities. You have been wonderful partners in this progress and have worked night and day since its start-up stage. It is not the time to be fidgety or concerned; instead, it is the time to be more motivated.

To my colleague Directors, I express my thanks to you for your constant guidance and encouragement. Thank you, shareholders, for your unstinted support over the years.

 With Best Wishes

 V. Vaidyanathan

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Chairman Message to Shareholders - 2017

Iron man Sardar Vallabhbhai Patel unified India politically, GST will unify India economically. It’s that big a moment.


 It gives me great pleasure to present to you your Company’s Annual Report for FY17, share with you your Company’s progress thus far, and thoughts for the future.

Clearly the most significant event of the year was the government’s decision to demonetise 86% of the high-value currency in circulation in one stroke. This government has implemented many significant reforms since it has assumed office three years ago, but demonetisation has to be counted as the boldest decision this government has taken.

No matter what the contrasting opinions were, for all high-value currency to hit the system and wash itself for cleanliness, and to give a one-time jolt to promote digital India, this was amazing means. Data shows that economic activity is back to pre-November levels. Enquiries for loans are a lightning rod for economic activity. CIBIL reports show that retail loan enquiries fell 12% in November ‘16 over September ‘16, but by February ‘17, it was higher over September ‘16 by 9% That things stabilised quickly within 3 months, and business is back to normal is a big vindication. Nine million new taxpayers crawled out of the woodwork and paid their taxes for the first time. 

Demonetisation may be remembered for a few years, but GST will be remembered for ever. Millions of un-organised business people will register themselves for GST and start paying their taxes for the first time, as not doing so will make them uncompetitive as they won’t get input credit. For the first time, we will become one nation economically– it was sometimes easier to import instead of buying from another state of India! When the bill was passed in the Rajya Sabha in August 2016, I tweeted “Iron man Sardar Vallabhbhai Patel unified India politically, GST will unify India economically. It’s that big a moment”. That sums up GST’s significance for generations.

The smartest decision by this government has to be accepting Aadhaar as the platform for a new India, even if it was initiated by the previous government. The Aadhaar platform has not only made a digital India possible through e-kyc, e-signature, and e-payments, but has also helped reduce ghost beneficiaries who were sucking and siphoning what was meant for the poor. I hope the judiciary sees the merit of making Aadhaar mandatory for availing all government benefits to avoid such siphoning, of course with a lead notice period for the citizens to sign up. If we “also” provide subsidy benefits to people outside of such authentication system, the ghosts will always hide under the “also” category, we can’t effectively weed them out and middlemen will consume the poors’ entitlements.

An important part of India Inc. is the voiceless small entrepreneur. I have always been publicly advocating for progressive and lower tax rates for small enterprises in various forums including ASSOCHAM, National Business events, budget debates, and even in representation to the Finance Minister and to the Minister of State for Finance, over the last three years. It’s more equitable - after all why should small enterprises pay the same tax slab as the large ones? Don’t salaried people with large pay-checks pay higher taxes? Besides, small enterprises largely deal in cash so you might as well encourage them with low taxes and bring them to the tax net. I am delighted that in its latest budget FY 17-18, the government reduced the tax rate for small companies with turnover of less than 50 crores to 25%. No one can say that any move by the government was because of their representation, neither can I. But I am happy nevertheless that this was implemented. In the next stage, I wish the same for other small entities, including proprietorships and partnerships, who are not covered under this structure today.

Finally, in financial services, the big breakthrough was awarding new bank licenses. India waited 25 years after nationalisation for 5 licenses to be issued in FY94. After ten years, in FY04, 2 more bank licenses were issued. After yet another ten years, in FY14, 2 more were issued. In FY15, 19 bank licenses, including payment and small banks, were issued. In FY16, it was announced that bank licenses would be issued on tap.

The theme with which your Company was founded is that financing India’s 50 million MSMEs and its fast-emerging middle class, with a differentiated model, based on new technologies, provides a large and unique opportunity. Keeping with this theme, the Company has continuously grown its retail businesses over the years, and has built a strong business model focussed on these areas. I am happy to share that the Company has so far successfully financed more than four million customers in 222 locations across the country thereby establishing a connect with millions of customers.

I am pleased to share with you that once again, we have augmented our presence in the retail business segment. Retail lending now stands at 93% of the Assets Under Management as of March 31, 2017.

The Company’s loan book grew by 24% from 160.41 billion ( 16,041 crores) in FY16, to 198.24 billion ( 19,824 crores) by the end of FY17. We are happy to share that along with this growth, we have maintained our asset quality at high standards with Gross NPA at only 0.95% and Net NPA at 0.30%, on 120 DPD basis.

The NII has grown by 59% from 8,181 million in FY16 to 13,008 million in FY17. The total income too grew by 65% to 16,403 million in FY17 from 9,918 million in FY16.

The PAT grew by 44% from 1,661 million in FY16 to 2,389 million in FY17. I am confident that the Company will continue to grow its business at a compounded rate and such growth will translate into an abundant increase in profits as well.

I am happy to inform you that your Company has been rated AAA on its long-term debt instruments. 

One of the remarkable successes for your Company in recent years is that it has successfully diversified its lines of credit from a large number of institutions. The Company now avails credit from over 221 reputed institutions including banks, mutual funds, provident funds, pension funds, superannuation funds, gratuity funds insurance companies, domestic and international Financial Institutions as at end March 2017, compared to a total count of 171 institutions in FY16. This ensures a steady stream of funding for continued growth in the future.

I am delighted to share that during this financial year, GIC, the Sovereign Wealth Fund of Government of Singapore, with over USD 100 billion of funds under management invested 3.40 billion into the Company in December 2016, taking the Capital Adequacy to 20.34% as of March 2017. Subsequently in May 2017, Warburg Pincus reduced its stake from 61% to 36%, and we are proud to inform that the stake was bought by GIC and a number of marquee foreign and domestic investors. In the process, GIC demonstrated its confidence in the Company by increasing its shareholding to 14%. We are overwhelmed by such show of confidence in your Company from globally top rated firms and hereby reaffirm our commitment for the highest standard of business and corporate governance anywhere in the world.

I am happy to share that your Company is carrying on CSR activities with great vigour. I assure you that I personally encourage employees to actively participate and widely support the CSR activities through their personal efforts. We have further expanded the scope and magnitude of these initiatives. Our flagship CSR programme, Capital First Scholarship Program (CFSP) entails providing financial assistance to meritorious students from the economically weaker sections of the society, and this is progressing extremely well. We have also tied up with various NGOs and change agents to sponsor programmes in the field of education and skill training for the economically weaker sections of society. We are pleased to report that these programmes have moved beyond the drawing board stage and showing tangible results.

I am happy to assure you that all the employees are working extremely hard with great dedication, high energy and strong commitment throughout the year for your Company. I sincerely thank them all vide this letter. I would also like to thank all our stakeholders including our lenders and customers for reposing their faith in us and thank our regulators, for their constant support and guidance.

I also express my thanks to all our Directors for their invaluable contribution through their guidance and encouragement, which have been critical for the success of the Company. Finally, I thank each and every shareholder, large and small, for your confidence in us.

With your continued support and trust, we look forward to growing your Company and contributing to the economic progress that our country is set to achieve.

Thank you

With Best Wishes

V. Vaidyanathan

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Chairman Message to Shareholders - 2016


It is with great pleasure that I present to you your Company’s Annual Report for FY16 against the backdrop of increasing optimism within India.

During the year gone by, all key macro metrics that influence the growth of the economy improved. The fiscal deficit, current account deficit and inflation have stabilised. More relevant, these improvements are sustainable in nature as the policy framework, like aligning domestic oil prices to global movements for instance, have been implemented. Further, large ticket government investments in roads, railways, defence and other such sectors will play a catalyst role in reviving the economy. Interest rates too are trending downwards apart from a possibility of a good monsoon. These factors will create a more enabling environment for large and small businesses going forward.

The theme with which your Company was founded is that financing India’s 50 million MSMEs and its fast-emerging middle class, with a differentiated model, based on new technologies, provides a large and unique opportunity. The Company has so far financed more than 2.25 million customers including more than 1.5 million self-employed individuals and MSMEs.

Keeping in line with this theme, your Company has been consistent in its strategy to transform itself into a unique retail financial services institution over the past 6 years. Within this short span of time, we have built an extensive reach of 222 locations across the length and breadth of the country and have developed proprietary underwriting methods including usage of automated credit scoring models.

The Company has established for itself a unique franchise where it has developed the capability to provide small ticket loans. Over 97% of the Company’s 2.25 million customers financed have between 20,000 and 2,00,000 with an average tenor of 8 months to 2 years. These are difficult to originate, to manage, and to collect because of the relatively small book size from this business. Further, the small size of EMI and quick run off makes it challenging. Your Company is working on the means to improving capabilities to manage these accounts in a sustainable way.

I am pleased to share with you that this year, the retail business as a proportion of the overall AUM stands at 86% as of March 31, 2016, primarily driven by the growth in the retail business segments like consumer durable financing, two-wheeler financing, loan to MSME and self employed people, for which there is a vast untapped opportunity in India.  

While we are pleased that the Loan book has grown by 34% from 119.75 billion ( 11,975 crores) in FY15 to 160.41 billion ( 16,041 crores) by end of FY16. We are even more pleased that we have been able to maintain our asset quality at high standards compared to the industry.

The NII has grown by 53% to 8,181 million in FY16 from 5,363 million in FY15. The total income too grew by 51% to 9,918 million in FY16 from 6,588 million in FY15. Against the backdrop of such growth in assets and income, the operating expenses grew by 30% in FY16 over FY15.

I am also pleased to inform you that the PBT grew by 52% from 1,662 million in FY15 to 2,522 million in FY16. I am confident that the Company will continue to grow its business at a compounded rate and such growth will translate into an abundant increase in profits as well.

Our Gross NPAs and Net NPAs have continued to remain low at 1.07% and 0.55%, respectively, at 150 DPD NPA provision norms. We are confident that your Company will continue to maintain its high asset quality in the years to come as compared to industry benchmarks.

I am happy to inform you that your Company continues to enjoy a high long-term credit rating of AA+ on its long-term debt instruments 4 years in a row, which is achieved by very select players in the financial services industry. We also enjoy a short-term credit rating of A1+, which again is the highest rating available for this category.

One of the remarkable successes for your Company in recent years is that it has successfully diversified its lines of credit from a large number of institutions. The Company now avails credit from over 171 reputed institutions including banks, mutual funds, provident funds, pension funds, superannuation funds, gratuity funds and insurance companies. Some notable names include International Finance Corporation, LIC, GIC of India, SBI Mutual Fund, HSBC Mutual Fund, Sundaram Mutual Fund, UTI Mutual Fund, Deutsche Bank, SBI, HDFC Bank, Kotak Mahindra Bank, DSP Blackrock Mutual Fund, HDFC Standard Life Insurance, Bank of Baroda and Yes Bank. I am sincerely thankful to each and every one of these great institutions for extending their shoulders in building an institution that has great value addition to the social sector of this country.  

I’m happy to state that Capital First Home Finance Limited (CFHFL), wholly-owned housing finance subsidiary of your Company, has grown its loan book by more than 50% from 2.29 billion as of March 31, 2015 to 3.99 billion as of March 31, 2016. This is already profitable business for us and we have great growth aspirations for this business in the future with more contribution from the affordable housing segment.

Our aspirations go beyond becoming a larger robust financial institution. We strive to contribute actively in many education-centric initiatives which can play a critical role in social inclusiveness of the country. Based on detailed deliberations, we have decided to focus on select areas which we believe has maximum impact. We have rolled out ambitious programmes to reach the economically disadvantaged youth, children and women and those with mental health issues – using education as the enabling fulcrum. During the year gone by, we have achieved tangible outcomes in terms of numbers of individuals benefited and we look forward to expanding it further.

I would like to assure you that all our employees are working extremely hard with great dedication, high energy and strong commitment through the year for your Company. I sincerely thank them all vide this letter. I would also like to thank all our stakeholders for reposing their faith in us and thank our regulators, for their constant support and guidance.

I also express my thanks to all our Directors for their invaluable contribution through their guidance and encouragement, which have been critical for the success of the Company. Finally, I thank each and every shareholder, large and small, for your support and trust.

I assure you that each one of us is committed to build a company that is high on corporate governance, is of great value for society and is a Company that you will be proud of.

Thank you

With Best Wishes

V. Vaidyanathan

 

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Chairman Message to Shareholders - 2015


I am happy to present to you the Annual Report of your Company for FY15. The FY 2014-15 started on an anxious note for India, because of uncertainty about the impending national elections and the possible electoral combination. If any year is to be called a watershed year for India in its recent political history, it has to be 2014, with the NDA securing 336 seats to achieve unprecedented victory. Tensions eased, and hopes soared in India. With a stable government at the Centre, a number of progressive initiatives were announced in the succeeding months and the overall mood of consumers and the business community in India lifted. The country looks forward to accelerated economic growth from hereon.

Natural outcome of accelerated economic growth will be a rise in demand for finance from both the customer segments that the Company caters to – Consumer Finance and MSMEs. An economic revival inevitably translates into more jobs and therefore more purchasing power and purchase intentions. Small and Medium Enterprises experience the positive impact of economic growth, as they witness greater demand from their customers. Further, after a long pause, the RBI has started reducing rates, albeit cautiously. As I look ahead, further reduction in interest is only a matter of time, and this factor, coupled with a growing economy will lead to great times for India in the years to come.

At the Company level, there were many exciting development during the year including expansion and strengthening of all our businesses. But the jewel achievement of the year was the QIP raised by the Company for an amount of 3,000 million. I am delighted to share that marquee international and domestic financial institutions, such as Goldman Sachs Asset Management, Birla Asset Management and HDFC Standard Life participated in the issue and are now shareholders of the Company. This corporate action has increased our capital adequacy to 23.44% which is among the highest in the Financial Services Industry and has greatly enhanced our Financial strength and set the stage for continued growth in future years.

I am happy to share with you that the loan book of the Company has grown by 24% from 96.79 billion ( 9,679 Crores) in FY14 to 119.75 billion ( 11,975 Crores) by the end of FY15. The NII has grown faster at 58% to 5,363 million in FY15 from 3,394 million in FY14. The total income too grew 56% to 6,588 million in FY15 from 4,222 million in FY14. Against the backdrop of such growth in assets and income, the operating expenses grew by 24% in FY15 over FY14. The PBT grew by 182% from 590 million in FY14 to 1,663 million in FY15. I am confident that the Company will continue to grow its business at compounded rate and such growth will translate in a disproportionate increase in bottom-line growth as well.

I am pleased to share with you that the retail business as a proportion of the loan book has increased from 81% in March 2014 to 84% in March 2015, thereby leading great stability to the Company’s asset quality. If you study carefully, you will notice that the Company has been consistent in this approach since past 5 years and has stuck to the overall strategy to build a unique retail financial services institution. I am further delighted to inform you that we have now financed over 1.4 million customers, including more than 6,00,000 MSME customers till date.

I am proud to inform that your Company has one of the best asset qualities in the financial services industry. The Gross NPA and Net NPA have remained low for last many years and continue to remain low at 0.69% and 0.17%, respectively. We are confident that your Company will continue to maintain high asset quality in the years to come as compared to industry benchmark.

Your Company continues to enjoy a high long-term credit rating of AA+ on its debt instruments, which is among the highest ratings in the financial services industry. The Company also enjoys a short-term credit rating of A1+ which is the highest rating available for this category. Your Company has diversified lines of credit from 108 reputed institutions including banks, mutual funds, provident, pension, superannuation and gratuity funds and insurance companies including LIC and GIC of India. We are happy to inform that the financial markets rewarded your Company with highly competitive rates based on excellent business operations of the Company.

Your Company’s subsidiary Capital First Home Finance Private Limited (CFHFPL) received a license from the National Housing Bank (NHB) for commencement of Housing Finance Business during FY14. As on March 31, 2015, the loan book size has grown to 2,287 million.

During FY15, your Company has taken several steps towards making efficient and robust operating systems to provide a platform for growth and to provide world class customer service for our customers, including the investment in quality processes, contemporary IT application systems and strong security frameworks. We further invested in our human capital and emphasised on a culture of performance, meritocracy and ethics.  

It was a matter of great honour for the Company that Mr. Timothy Geithner, former Secretary of the U.S. Department of the Treasury, who is renowned for guiding the US through the global economic crisis 2008-09, visited your Company during this financial year accompanied by Mr. Charles Kaye, Co-Chief Executive Officer at Warburg Pincus. This was a crowning moment of glory for your Company.

I thank each and every employee for their sincere dedication, commitment and extreme hard work, all through the year. I thank every financial institution for reposing their faith in us and regulators for their constant support.

I would also like to thank all our Directors for their invaluable guidance and encouragement, which have been critical for the success of the Company. Most of all, I sincerely thank each and every shareholder for Total Income ( million) 6,588 + 56% 4,222 March 31, 2015 March 31, 2014 your unflinching support and trust to the Company. Finally, I would like to welcome the new shareholders of the Company who subscribed to the QIP and assure all shareholders that we will make every effort to honour your trust by running the Company with great ethics, integrity and honesty.

Thank you!

With Best Wishes

V. Vaidyanathan

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Chairman Message to Shareholders - 2014

We are happy to share that the retail business as a proportion of the loan book has increased from 10% in FY10 to 28% in FY11 and 56% in FY12, 74% in FY13 and has now reached an all-time high of 81% by March 2014.


It is with great pleasure that I present to you the Annual Report of your Company for the year 2013-14.

It was a rather tepid year for India on the economic front, with GDP growth at under 5%. Thankfully, the government took some bold decisions early during this fiscal year and many of the key indicators like CAD and Fiscal Deficit came under control by the end of FY14. As I write this note, one of the most important elections of our times is playing out, and opinion polls suggest a stable national government will be formed. This will lead to more decisive governance, which will in turn lead to economic revival.

As you are aware, MSMEs in India are a key driver of employment and GDP for the country. At the same time, they are also among the most underserved segment in India. Your Company identified MSME financing as a key line of business for growth 4 years ago. I am happy to inform you that we have come a long way since then, and we have till date financed over half a million MSME customers through our various schemes.

The businesses we are building are those which provide ample opportunity to differentiate by using sophisticated technology, advanced scoring and decision sciences, as compared to plain vanilla financing businesses. For example, Consumer Durable and Two Wheeler financing businesses are relatively more complex as the ticket size of loans is low and tenor is short and requires relationship with thousands of dealerships, and lacs of customers across remote geographies. These businesses can only be built on a sustainable basis using scientific tools, and by using predictive capabilities for customer cross-sell, automated collection systems and a robust CRM platform. Further, these businesses are not worth the time and effort for large banks, as they form only a tiny proportion of their loan book, even after a full scale roll-out. Hence, this offers an attractive niche for your Company.

Business Performance

We are happy to share that the retail business as a proportion of the loan book has increased from 10% in FY10 to 28% in FY11 and 56% in FY12, 74% in FY13 and has now reached an all-time high of 81% by March 2014.

Against this backdrop, FY14 has been a good year for your Company. The following are the key highlights for the year:

  • We are happy to inform you that we have now financed over 8,00,000 customers, including 5,50,000 MSME customers till date.
  • All our lines of businesses are growing strongly, resulting in our AUM increasing 29% to 96.79 billion on March 31, 2014 compared to 75.10 billion at the end of FY13.
  • Consequently, the NII has grown by 34% to 3.36 billion from 2.50 billion in FY13.
  • The total income too grew 26% to 4.22 billion from 3.36 billion over the same period. 
  • Against the backdrop of such growth in assets and income, the operating expenses grew only by 19% in FY14 over FY13.
  • We are proud to inform that your Company has one of the best asset quality in the financial services industry. The Gross NPA and Net NPA have remained low for last many years and continues to remain low at 0.45% and 0.08% respectively. We are confident that your Company will continue to maintain high quality of assets in the years to come based on our strong credit due diligence and collection processes.
  • We are happy to inform you that your Company launched many new businesses during FY12 and FY13 which needed requisite investments in the initial phases. These businesses have acquired critical size and are moving towards profitability as per plan. Your Company expects the profitability to continue to improve due to better operating leverage going forward.

You may recall that your Company made a key change in accounting policy last year, whereby the Company started amortising securitisation and fees collected from customers over the life of the loan. I am happy to inform you that this change, along with steady growth in business, has already begun to show positive results, and consequently the PBT has sequentially increased every quarter of FY14. The PBT grew from 74 million in Q1FY14 to 115 million in Q2FY14 to 169 million in Q3FY14 to 232 million in the last quarter of the year. 

Credit Rating: We are also happy to share with you that your Company continues to enjoy a high longterm credit rating of AA+ on its NCDs and subordinate debt, which is among the highest ratings in the financial services industry. The Company also enjoys a short-term credit rating of A1+ which is the highest rating available for this category. Consequently, your Company raised debt capital from the financial markets highly competitive rates. 

Lines of Credit: Over the last few years, your Company has continuously expanded the list of institutions for its lines of credit. Your Company now enjoys the backing of a formidable array of large institutions including 27 Banks, 15 Mutual Funds, 58 Provident, Pension, Superannuation and Gratuity Funds, and two insurance companies including LIC and GIC of India. We are happy to inform that the financial markets rewarded your Company with highly competitive rates based on excellent business operations of the Company.

Equity Raising: I am happy to inform that two marquee names of the financial service world, Warburg Pincus through their affiliate Cloverdell and HDFC Standard Life Insurance Company Ltd. have subscribed to preferential issue of equity shares for 178 crores. We are happy to inform that the issue was priced at a premium of 10% to then prevailing market price, and a 13% premium to the last one month share price at the time of the issue. We are happy to welcome HDFC Standard Life as a new shareholder of the Company.

This infusion of capital has enhanced the status of your Company in many ways. At an intangible level, the transaction demonstrated the continuing commitment of Warburg Pincus to your Company. At a more tangible level, the balance sheet has been strengthened  further by increased capital adequacy, which has now reached 22.16%.

We are happy to inform you that during the year your Company’s subsidiary Capital First Home Finance Private Limited received the licence from the National Housing Bank NHB for commencement of Housing Finance Business during the first quarter of FY14. CFHFPL has already started originating home loans during FY14.

Your Company has wound down its broking businesses including securities broking and commodities broking to enable greater focus on the core business of MSME and Consumer financing.

During FY14, your Company has taken several steps towards making efficient and robust operating systems to provide a platform for growth and to provide world class customer service for our customers. Your Company also initiated implementation of the Customer Relationship Management system for further improvement of our customer experience. We further invested in our human capital and emphasised on a culture of performance, meritocracy and ethics.

With a fresh political mandate for a stable government, and with green shoots of economic revival beginning to be visible, we look forward to a better business environment in the coming year. 

I thank each and every employee for their dedication and commitment all through the year, through thick and thin. I thank every financial institution for reposing their confidence in your Company. I thank the regulators for their constant support. I would like to thank all our Directors for their invaluable guidance and encouragement which have been critical for the success of the Company. I thank each and every shareholder for your continued support and trust.

With Best Wishes

V. Vaidyanathan

X

Chairman Message to Shareholders - 2013

I am grateful to the banks, employees, regulators, credit rating agencies, customers and shareholders who stood by us during this uncertain period


I am pleased to share with you the Annual Report of your Company for the year 2012-13. This is the first Annual Report after the Company has been re branded as Capital First Limited.

The GDP growth rate for the Indian economy was subdued due to global and domestic factors over the last couple of years. During the second part of the fiscal year 12-13, the government took some concrete steps to address the economy, and the RBI responded by easing the monetary policy to support growth. Notwithstanding the economic cycles, India continues to be well placed structurally for long-term growth supported by growing aspirations, a burgeoning middle class, favorable demographics, growing entrepreneurship, and an approach to free markets. 

While matters pertaining to economy were rather generic for all companies, your Company in particular faced immense challenges last year. The fiscal year started with uncertainty about the ownership of the Company, as the news of Future Group wanting to exit their stake was doing the rounds. The press was routinely speculating about whom discussions were going on with, and what the stages of discussions were (Refer to page 10 & 11). Ours is a financial services Company, and even a single story in the nature of change of ownership in the media was enough to disturb the funding cycle and the Company’s operations. Your Company had to deal with such reports repeatedly through this period, often many times during a month.

Since funding is the raw material of our business, your Company needed the confidence of our lenders for retaining and enhancing fresh borrowing lines, even as these reports appeared. Your Company needed the confidence of the rating agencies. We also needed the support of the regulators who were concerned about such reports. In addition, the Company needed the confidence of the existing employees to avoid attrition and to attract new talent who were apprehensive about the uncertainty.

Meanwhile, we were indeed talking to multiple potential investors during this period, and convincing them about the business opportunity. We couldn’t confirm or deny developments to the media, as these were yet at discussion stage with potential partners. In the midst of all this, we issued clarifications, and made every effort for truthful and material disclosures. During this phase, your Company continuously engaged with these stakeholders through TV and press interviews despite the situation being nebulous. This was a complex and challenging period for the Company.

In June 2012, Warburg Pincus, a reputed global private equity major with US$ 40 Billion Assets Under Management announced their decision to acquire majority stake in the Company, followed by an open offer and an infusion of primary equity capital of 1.00 billion through its affiliate Cloverdell Investment Ltd.

The challenges did not end with the announcement of the deal. Post announcement, many regulatory approvals were yet required to execute the transaction. The transaction required approval from FIPB, clearance from SEBI for the Open Offer, NOC from the RBI, approval from RBI’s Forex division, clearance from Stock Exchanges and approval from the Forward Markets Commission. Further, we needed NOC from all our existing banks for the transaction. These approvals were needed to be done in parallel, often with dependencies on each other, within tight timeframes. I am immensely grateful to each one of the institutions mentioned above, for their understanding and timely approvals. The last leg of the transaction was finally concluded on December 4, 2012.

Despite these circumstances, the loan assets for your Company grew by 21% to touch 75.09 billion in FY13.

I am grateful to every bank and financial institution who stood by us during this uncertain period. I express my sincere thanks to every employee who were assiduously working to build the Company during this phase. I am grateful to the rating agencies who spent their valuable time in understanding our cash flow management and our business model, and for reaffirming their faith in us during this period. I am grateful to the regulator for retaining supporting us during this phase. I am grateful to the media for their unbiased reporting of the matter.

I am grateful to the Future Group for handling the matter with great grace and sensitivity, and thank them for their confidence and support during this period.

I am equally grateful to Warburg Pincus for their confidence in our Company, for backing the management, and for believing in the Company’s vision to become an admired retail financial services organisation.

I am thankful to the entire team of Morgan Stanley for their hard work, tenacity, and excellent contribution in successfully concluding the transaction.

In terms of strategy, your Company stayed steadfast on the approach of building businesses that provide adequate margins and security. The main line of business for your Company continues to be providing secured loans to MSME players for their working capital needs. Your Company has built sound competencies in studying cash flows of SMEs, which is a relatively difficult area to specialise in India. The Company has successfully established a machinery to evaluate the credit needs for SMEs in a personalised manner. This business constitutes 83% of the total retail portfolio of the Company.

Further, the businesses we are building are those which provide ample opportunity to differentiate by using sophisticated technology, advanced scoring and decision sciences, as compared to plain vanilla financing businesses. For example, Consumer Durable and Two-Wheeler financing businesses are relatively more complex as the ticket size of loans is low and tenor is short and requires relationship with thousands of dealerships, and lacs of customers across remote geographies. These businesses can only be built on a sustainable basis using sophisticated tools like the ones described above, and by using predictive capabilities for customer cross sell, automated collection systems and a robust CRM platform. Further, these businesses are not worth the time and effort for large banks, as they form only a tiny proportion of their loan book, even after a full scale roll out. Hence this offers an attractive niche for your Company.

Retail businesses have relatively higher operating and distribution costs initially, but once established, provide for sustainable and significant profits over the years. Your Company is yet at a stage of investing in these businesses.

Retail businesses have relatively higher operating and distribution costs initially, but  once established, provide for sustainable and significant profits over the years. Your Company is yet at a stage of investing in these businesses.

I am happy to share that through the year FY13, your Company continued to grow its Loan Assets under Management while focusing on the asset quality. Your Company continued its focus on building retail assets, which now contributes 74% of the assets, compared to 56% in the previous year. During the year, the Consumer Durables business has grown from 444 mn in FY12 to 1,821 mn in FY13. The Gold Loans business grew from 2,343 mn in FY12 to 4,408 mn in FY13. I am happy to inform that the Two-Wheeler Loans has grown from 138 mn to 1,631 mn in FY13. The SME mortgages business has grown from 30,510 mn to 46,234 mn in FY13.

The profit after tax came down by 40% this year to 631 mn. I would like to specifically address the reason for the same. During the year, your Company changed the accounting policy and made it more conservative. Your Company decided to amortise securitisation income and fee income received from customers over the life of the loan, and this amortised income will reflect in the P & L in the future years. Since the same was recognised upfront in the previous years, the year-on-year Profits are not comparable.

In addition, your Company is currently in a scale-up stage and is investing in new lines of businesses described above and incurred setting up costs which are part of any growing company. Scaling up of these businesses also required commensurate investment in IT, collections and credit resources. In fact, on achieving critical scale, the Company is confident of growing profits in a sustainable manner in the years to come based on the above investments. Our Gross NPA and Net NPA remained low at 0.11% and 0.01%, which is favourable compared to general financial industry standards.

In spite of high interest rates and tight liquidity conditions through the year, your Company successfully diversified its borrowing profile, and raised funds through NCDs, Term Loans, Perpetual Debt and Subordinated Debt. We are happy to inform that the financial markets rewarded your Company with attractive and competitive rates, based on the excellent business operations of the Company.

You will be delighted to note that the long-term credit rating of your Company has been upgraded two notches to AA+ based on conservative asset-liability management, high asset quality, strong credit processes, robust operations framework, experienced management team and strong promoters. I am also happy to inform you that the capital adequacy of your Company has increased to 23.53% in FY13, up from 18.63% in FY12.

During the year, we also strengthened our Internal Control Systems, our lending practices, enhanced our Risk Management Practices, and invested in IT systems to improve our efficiencies and to build the platform for further growth. We further invested in our Human Capital, and emphasised on a culture of performance to achieve sustainability in our business. Your Company looks forward to steady growth in the future with a continued focus on its retail lending portfolio. 

I sincerely thank each one of our Directors for their invaluable guidance, wisdom and encouragement particularly during the trying times of the last year, which has been critical for the success of the Company. I sincerely thank the former Directors for their immense value and support, and welcome on board the new Directors who come with excellent reputation and experience.

I sincerely thank you all for your continuous encouragement, support and trust.

With Best Wishes

V Vaidyanathan