CSL Finance Ltd Share Analysis

CSL Finance Ltd is a Non-Banking Finance Company registered with the Reserve Bank of India headquartered in New Delhi. CSL Finance Ltd is a one-stop destination for small and medium-sized enterprises (SMEs) and real estate and non-real estate corporations to avail themselves of various secured loan products.

We find CSL Finance Ltd. interesting because management is guiding for strong growth in AUM over the next few years, led by the SME vertical. CSL Finance Ltd.’s current debt/equity ratio of ~1x gives it ample leverage to grow its balance sheet. Its recent credit rating upgrade from BBB+ to A- will give CSL Finance Ltd access to more lenders and cheaper funds. Over the past few years, management has spent a lot of time and effort building a strong business base, from which rapid and value-accretive growth now seems possible. The cautious and prudent nature of management is reflected in CSL Finance Ltd.’s history of building a secured lending portfolio with low leverage ratios, comfortable liquidity positions, high capital adequacy ratios and high provision coverage ratios. The robustness of the business is reflected in CSL Finance Ltd.’s consistent track record of low credit costs, low NPAs and high return on asset ratios. We think that for India to grow robustly over the next few decades and for a large number of jobs to be created, India’s Small and Medium Enterprises need to grow rapidly. This can happen only if the SME sector has adequate access to affordable credit. Hence, CSL Finance Ltd.’s position in this sector is attractive in the long term. Incrementally, a bulk of the growth in AUM for CSL Finance Ltd. will come from the SME vertical, as guided by management. Even in their wholesale lending vertical, CSL Finance Ltd.’s loans to real estate players are differentiated, with loans being given in the affordable to mid-segment only and the loans being of relatively lower tenure and carrying relatively lower execution risk. 

CSL Finance Ltd Company Overview

CSL Finance Ltd. is a micro-cap non-deposit-taking NBFC headquartered in New Delhi that lends across two sectors:

1. small-ticket real estate loans in Delhi NCR micro-markets and

2. SME lending in North and West India. 

CSL Finance Ltd. was founded in 1992 and listed on the BSE in 2006 as Consolidated Securities Ltd. The current promoter, Mr. Rohit Gupta, took control of this company in 2004 when the company’s equity base was INR 4Cr. Initially, CSL Finance Ltd. was an investment company which invested long-term in small, fairly valued companies such as APL Apollo Tubes and Asian Oil Fields (now known as Asian Energy Services) and managed to increase their equity base from INR 4Cr to INR 45Cr in a span of 4 years. After the 2007-08 financial crisis, they pivoted from long-term investments to shorter-horizon investments, exploiting special situations, mergers, demergers, buyback rights issues, etc. However, they soon realised that such opportunities could not be exploited in a predictable manner regularly and that one could not build a sustainably growing company in this manner. This realisation prompted them to enter into lending in a small way. They entered secured wholesale lending by giving short-term funds to Delhi-NCR-based real estate players and educational institutions in 2011. From 2011 to 2015, they ran both verticals – investments and wholesale lending. Once they started gaining experience and confidence in lending, they began scaling it up. FY17 was a pivotal year in their history. In FY17, they decided to shut down the investment vertical and focus exclusively on lending. The same year, they also decided to venture into small-ticket retail SME loans to make their loan book more granular. They also changed their name from Consolidated Securities Ltd. to CSL Finance Ltd. to reflect this change in direction for the company. Since FY17, CSL Finance Ltd. has consistently scaled up its loan book across both verticals of SME lending and wholesale lending very competently, steering the balance sheet skillfully through the ILFS and COVID crises without taking any major hits. 

CSL Finance Ltd Management Details

CSL Finance Ltd  is a promoter-run and promoter-driven company. Promoter Rohit Gupta is a Qualified CA with over 2 decades of experience in merchant banking, corporate finance, financial restructuring, project finance, capital markets, and structured lending. He has steered the Company to specific niche market segments and envisioned its foray into SME lending. Rachita Gupta, daughter of Rohit Gupta, is a commerce graduate and Master’s in Business Finance from Warwick Business School, UK. She started her career with EY and has experience in analytics, data management, digital marketing, and corporate branding. She played a vital role in the rollout of the Technology platform for the retail lending segment as well as other departments of CSL Finance Ltd.

The promoter and promoter group shareholding stands at 47.43% as of June 30, 2024

CSL Finance Ltd. Industry Landscape

CSL Finance Ltd. is present in two lending verticals: small-ticket wholesale Real estate financing and SME lending. Let’s examine the industry dynamics of each segment in detail. 

Real estate lending 

CSL Finance Ltd has been in the small-ticket real estate lending segment since 2011. While the segment will keep growing, its % share in the total AUM is expected to go down as the SME lending segment scales up more rapidly. It is tough to get data about small-ticket micro-market-focused real estate lending in India (which is relevant to CSL Finance Ltd, so let’s take a brief look at the overall real estate lending industry in India.  

As of 2023, the Real Estate Sector contributes ~7.3% to India’s GDP. This is expected to reach ~14% by 2030 (Source: IMF, JLL Research), indicating rapid growth in the sector. This growth will need to be supported by lending from banks, NBFCs and AIFs. The real estate sector has gone through tough times in the last few years due to demonetization, the ILFS crisis, and COVID-19. However, since COVID-19, the sector has emerged stronger with regulations like RERA and GST, bringing in more transparency for lenders and higher customer reliability.

Over the last 6 years, ~INR 9.6 Lakh Cr loans have been sanctioned towards real estate financing, an average of ~INR 1.6 Lakh Cr per annum. 

Since 2018, the mix of lenders financing real estate projects has shifted markedly from NBFCs and HFCs (Housing Finance companies) to private and public sector banks. While NBFCs and HFCs were together responsible for 55% of the total lending done to the real estate sector in 2018, this number dropped to only 16% in 2023. At the same time, the proportion of lending done by private and public sector banks increased from 37% in 2018 to 68% in 2023. This shift mostly happened as a result of the ILFS crisis, which caused a loss of confidence and a liquidity crisis for NBFCs in India, especially with wholesale loans such as real estate lending. NBFCs moved into granular retail loans, thus leaving vacant space for the banks to occupy. The merger of HDFC Limited with HDFC Bank has also caused some data distortion during this period. Still, overall, the proportion of real estate loans sanctioned by NBFCs and HFCs has dropped significantly after the ILFS crisis, in spite of it. 

The real estate lending market today remains a very concentrated one, with a few large players in each lending cohort dominating lending.

Source: Propstack Research report

According to research done by Propstack, there was a INR 1.5 Lakh Cr funding deficit for residential real estate construction in the top 7 cities of India between 2018-2023.

 Source: Propstack Research report

The relative lack of funding for wholesale real-estate loans in India since 2018 and the bounce back in the real estate sector post-Covid suggest this is a lending segment which should see healthy demand in the near future. 

SME Lending Segment

CSL Finance Ltd. wants to scale its AUM rapidly in the SME segment in future. Let’s take a detailed look into the SME lending industry in India.

As of FY22, there are estimated to be a total of ~7Cr MSME organisations in India. The MSME segment contributes nearly 30% of India’s GDP and 40% of India’s exports. It is one of the largest employers in India, employing ~11Cr Indians. Approximately 99.5% of all MSMEs in India are micro-enterprises, with only 0.5% being small enterprises and 0.01% being medium enterprises. Micro enterprises have a turnover of less than INR 5 Cr; small enterprises have a turnover between INR 5-50 Cr and medium enterprises have a turnover between INR 50-250 Cr. Almost 96% of all MSMEs in India are proprietorships or partnerships. 

The MSME segment is starved of formal credit from banks and NBFCs, especially the small enterprises engaged in a myriad of businesses such as kirana stores, building materials stores, tea shops, vegetable vendors, tailors, saloons, fabricators, machine tool manufacturers, vehicle service centres and others. This segment, therefore, depends on informal sources of credit such as local moneylenders, chit funds or financing from friends and family. Such informal sources of credit are very costly, with interest rates on loans varying between 30-60% per annum. According to an IFC report titled Financing India’s MSMEs (2018), the credit demand from MSMEs was INR 69.3 Lakh Cr in 2017. Of this, only 16% of demand for credit was being met by formal channels of banks and NBFCs, while 84%, amounting to ~INR 58 Lakh Cr, was still dependent on high-cost informal credit channels. It’s believed that due to COVID-19, this formal credit gap has increased further to ~INR 83 Lakh Cr by 2022. 

Smaller enterprises with turnover < INR 50 Lakhs and < INR 1 Cr are especially starved of formal credit. Most of their working capital and investment requirements are fulfilled via the promoter’s capital. 

Within the broader MSME lending segment, the estimated potential market for residential property-backed secured MSME lending is estimated to be ~INR 22 Lakh Cr. Such residential property used as collateral for secured lending is called SORP (Self Owned Residential Property). 

While the potential market for SORP-based secured MSME lending is high in India, not many lenders have built scale in this segment due to the following challenges.

1. Most customers don’t have any formal documentation such as ITR records, bank statements, GST registration, etc. 
2. Without formal documentation, a lot of local due diligence is needed for proper underwriting. This requires competent local manpower and intensive operations 
3. Establishing formal titles and valuations of SORP in semi-urban and rural locations is challenging.  
4. This results in high cost of operations 

Compared to other loan products such as affordable housing finance, microfinance, auto loans and personal loans, small business loans secured by residential property have a good mix of high yields combined with good collateral quality and low tendency to default.

The total size of formal credit outstanding to MSMEs as of FY22 is estimated to be INR 21 Lakh Cr by CRISIL Research. MSME credit from formal sources is estimated to have increased at a CAGR of 10% between 2012-2022, in line with nominal GDP growth rates during the period. 

Of this total, INR 21 Lakh Cr of credit outstanding to MSMEs as of FY22, less than 10%, i.e. ~INR 1.9 Lakh Cr of loans were small business loans of size less than INR 10 Lakhs each. Compared to the overall MSME credit growth CAGR of 10%, this segment of < INR 10 Lakh MSME loans has been growing at a CAGR of 22% between FY18 and FY22. Over the last few years, expansion in branch networks, better data availability, government initiatives like GST and UDYAM, and an increasing thrust on adopting digital payments have increased penetration in this underserved segment. 

This segment is expected to keep growing at healthy CAGR rates in the near future as the MSME credit gap gets bridged over time, led by better data availability, greater access to such businesses due to better infrastructure, and increasing realisation from business owners that formalising their business to access formal credit may be a better proposition than paying usurious rates to the local moneylender. 

With the increasing penetration of small-ticket business loans, the proportion of new-to-credit customers in this segment has been increasing across all lending cohorts.

Small business loans to the MSME sector are addressed by a host of lending cohorts such as public and private sector banks, NBFCs and others such as Small Savings Banks. Over the last few years, the fastest growth in lending and the highest share of disbursements to this segment has come from the NBFC cohort. 

Some of the key players in the small business loans segment are – Five Star Business Finance, SBFC Finance Ltd., Capri Global Capital Ltd., IIFL Finance, Poonawala Fincorp, Ugro Capital Ltd., AU Small Finance Bank, Equitas Small Finance Bank, etc.  

CSL Finance Ltd Product Details

CSL Finance Ltd is present across two segments of lending 

1. Small ticket real estate loans to builders in the Delhi-NCR micromarket (wholesale lending )
2. SME lending across several states of North India 

As you can see from the table above, CSL Finance Ltd currently has a 57%-43% AUM mix in favour of wholesale lending. However, the mix has rapidly moved in favour of SME lending in recent years. In FY19, the same mix used to be 83%-17% in favour of wholesale lending. Over the last 5 years, the SME lending AUM has grown from its small base at a rapid CAGR of 51%, whereas the wholesale lending AUM has grown at a CAGR of 17%. The SME AUM growth has picked up in the last 3 years, which has increased by 6.5x. Let’s look at each segment in more detail. 

Small ticket wholesale real estate loans

CSL Finance Ltd started its lending journey in 2011 with wholesale loans to the real estate and education sectors. This business has been the mainstay of CSL Finance Ltd  since its foray into lending. CSL Finance Ltd loans in this segment are restricted to the Delhi-NCR region. It is considering moving into surrounding geographies like Chandigarh, Agra, Dehradun and Lucknow after doing the required due diligence.

Source: CSL Finance Ltd. FY23 Annual report

Let’s look at the various offerings in this segment in more detail

1. Wholesale large – Under this segment, CSL Finance Ltd lends to two categories of customers
   

• Mid-income group housing projects – Under this sub-segment, CSL Finance Ltd provides last-mile financing for mid-income real estate projects in the Delhi-NCR region, with the average ticket size of units being less than INR 60 Lakhs. Such projects are already 60-70% completed, with a large part of units already sold and receivables outstanding. CSL Finance Ltd provides bridge financing to such projects, with receivables acting as collateral. Typically, committed receivables are 3x the amount of the loan sanctioned. Thus, CSL Finance Ltd maintains an LTV of ~33% in this sub-segment. Thus, CSL Finance Ltd does not take construction risk while underwriting such projects. Project receivables are routed to an escrow account, ensuring that the builder cannot divert funds from customers and CSL Finance Ltd. gets paid on time. CSL Finance Ltd lends to smaller-sized builders who have only 1-2 projects ongoing at any one point in time. This helps CSL Finance Ltd track the overall financial position of the builder much more accurately. CSL Finance Ltd also ensures that it’s the sole lender to the account to keep control over repayments.

• Affordable group housing projects – Under this sub-segment, CSL Finance Ltd lends to affordable housing projects approved by the Haryana Government. The average ticket size per unit in such projects is ~INR 25 Lakhs and most of the projects get pre-sold almost to the extent of 100% at launch itself. LTV here is also between 30-40%.

2. Wholesale small – Under this sub-segment, CSL Finance Ltd lends to small builders who are building G+4 structures in the micro-markets of Gurgaon and South Delhi. The typical tenure for such loans is small, between 18-30 months. Projects get completed fast as they don’t come under the ambit of RERA and only need local municipal approvals. A significant portion of the funding is done via the builder’s own equity, typically 50%+. The short duration of the loans and a high proportion of builder equity, combined with the fact that CSL Finance Ltd only lends to such projects in the affluent micro-markets of Gurgaon and South Delhi, de-risk this segment to a large extent. Also, feedback loops are faster in this market, and supply corrections are quick if builders sense that demand is weak. This helps avoid elongated down-cycles.

3. Other wholesale lending – Under this segment, CSL Finance Ltd provides loans against property and loans against liquid securities. The company has consciously chosen not to grow this segment. Hence, the AUM has remained flat over the last 6 years. CSL Finance Ltd management feels that the assurance of receiving timely payments in this sub-segment is much lower than the other wholesale sub-segments where receivables are routed through escrow accounts.

The average yields in this vertical are around ~17%. Most of the loans are made at fixed interest rates (~75%), especially higher interest rate loans (> 17%). Loans earning lower yields of 15-17% are often floating in nature. Wholesale loans are 100% sourced via their own team. 

A few key metrics for each sub-segment of the wholesale lending vertical are presented below

Overall, the wholesale lending vertical of CSL Finance Ltd appears to be quite differentiated and seems to be different from any other wholesale real-estate lender for the following reasons 

1. Delhi NCR Micro-market – Management has focused on building competence in their home micro-market of Delhi-NCR. Their grip on builder quality, project progress and local demand dynamics in the Delhi-NCR market is very strong. These factors have resulted in their record of having almost no NPAs in this vertical since they started operations in 2011

2. Continuous monitoring – CSL Finance Ltd lays a lot of emphasis on bi-weekly to monthly physical monitoring of projects via on-ground employees. Their geographical concentration in the Delhi-NCR region facilitates this and also ensures better management control. Management keeps a close tab on project sales, inventories and receivables on a monthly basis and is quick to act on early warning signals.

3. Cautious geographical expansion – While the management wants to expand to nearby markets such as Chandigarh, Lucknow, Agra, and Dehradun, it is very cautious in its approach. A 6 month to one-year study period is required for CSL Finance Ltd to understand the local market dynamics before they even contemplate lending to builders in new geographies. They had intended to enter the Chandigarh market but decided to delay it after a 6 month study period as they felt that the market in Chandigarh was not yet mature enough

4. Low LTVs, last mile funding, shorter tenures and escrow accounts –  Several design elements of CSL Finance Ltd wholesale real-estate loans help de-risk the vertical

1. LTVs for wholesale loans are low – between 30-40% 
2. Payments are assured via escrow accounts, where project receivables are deposited and can be accessed directly by CSL Finance Ltd
3. Tenures for projects are less than 3 years. Most accounts get pre-closed as money comes in before the due date 
4. CSL Finance Ltd avoids construction risk in the large wholesale segment by providing bridge financing to projects which are already 60-70% completed and have significant outstanding receivables

Competition in this segment for CSL Finance Ltd comes from SFBs like AU Small Finance Bank and NBFCs such as IIFL Finance and Capri Global Capital Ltd. 

SME lending

CSL Finance Ltd started its SME lending journey in FY18. The company brought in experienced industry professionals with significant experience in scaling SME lending operations for NBFCs and banks to start this vertical. After a slow start and consolidation during the turbulent years of the ILFS crisis and COVID-19, the SME vertical has taken off in the last 3 years. The physical and technological infrastructure, along with the requisite experience, now seems to be in place for CSL Finance Ltd to keep scaling this vertical robustly in future years. 

The SME vertical targets self-employed and salaried customers in rural and semi-urban geographies of North India. The targeted customer segment is underbanked and under-serviced by the formal lending ecosystem due to a lack of formal, documented sources and proof of income and a lack of GST registrations and formal banking. Lending to this vertical requires a strong physical touchpoint, local employees and a good knowledge of the local business ecosystems. Underwriting loans to such customers requires a robust assessment of the customer’s Character, Cash Flows and Collateral. This needs several visits and local expertise to assess the customer’s past credit track record, the customer’s reputation in the local market and amongst neighbours, the customer’s intended purpose of taking the loan, the customer’s quality of income, the current size and historical growth of the customer’s business and the quality of collateral being offered (usually SORP) along with proper documents establishing unencumbered ownership of the collateral. This is a segment which is unattractive for large banks and NBFCs due to the lower ticket sizes and high operating costs and unsuitable for new age fintechs, which aim to underwrite customers based on digital data and documents such as ITR records, bank statements, GST statements, CIBIL score etc. Thus, this segment is a sweet spot for regional lenders like CSL Finance Ltd, who are willing to make an effort to set up the requisite infrastructure for underwriting such loans in Tier 3 and below towns. 

The average yield in the SME lending vertical is ~18%, the tenure can vary from short-term loans of 45-90 days duration to long-term loans of 5-7 years duration, and the loan amount can vary from INR 0.5-50 Lakhs for SME retail customers and INR 1-5 Cr for mid-sized SME loan against property (LAP) customers. 100% of the loans made under the SME vertical are sourced by CSL Finance Ltd in-house. 99% of the SME book is secured with high-quality, low default propensity collaterals. 85% of the collaterals are Self-occupied-residential-property (SORP), and 9% are self-occupied-commercial-property (SOCP). The propensity to default on loans with SORP as collateral is quite low as shelter is a basic human need, and there are significant emotions invested in one’s own house and significant social stigma attached to the act of losing one’s residential property in rural and semi-urban India. 

A snapshot of the various products under this vertical is presented below

CSL Finance Ltd has 29 branches in North India as of FY24. Rajasthan and Gujarat branches contribute ~56% of the SME AUM, while the rest is spread between Delhi, Uttar Pradesh, Haryana, Punjab and Uttarakhand. CSL Finance Ltd plans to increase its branch network by 50% in FY25 and to double the network by FY26. A typical branch takes 6-9 months to break even. Break-even usually happens at an AUM level of INR 7 Cr and an average 18-19% yield. At INR 10 Cr AUM, a branch starts becoming 

profitable, and between INR 10-20 Cr, it is at a healthy profitability level. The total opex cost for running a typical branch is ~INR 45-50 Lakhs. Each branch typically has 6-7 employees, with one branch manager, one credit manager and 4-5 sales and collections employees. 

Let’s briefly look at the 3 different sub-segments of the SME vertical. 

1. SME Retail – Under this sub-segment, small ticket size loans are given to Kirana stores, traders, schools and boutique shops backed by SORP/SOCP as collateral. The average ticket size is INR 12 Lakhs, and loan tenures can vary from 3-7 years

2. Mid-sized LAP – Under this segment, loans of ticket size INR 1-5Cr are given to larger businesses for working capital needs or business expansion. These loans are secured by the prime property. Loan tenures can vary from 2-3 years.

3. SME Fabricator loans (Suvidha loans) – This is a new sub-segment started byCSL Finance Ltd in collaboration with the APL Apollo Group. Under this sub-segment, CSL Finance Ltd provides 45-90 days of working capital finance to fabricators of APL Apollo products against invoices raised by retailers on the fabricators. The APL Apollo Group is providing an interest subvention benefit to the customers for the initial period of the loan. This is an unsecured product, but the risk involved in this sub-segment for CSL Finance Ltd is controlled to a large extent due to the high granularity of the loans and because CSL Finance Ltd can take feedback about its customers from APL Apollo’s retail network. Management believes this sub-segment can be worth INR 150-200 Cr AUM in 2-3 years with yields between 22-26%. Once the business stabilises, CSL Finance Ltd will also look for anchor customers beyond the APL Apollo Group. This sub-segment has high entry barriers as it is very operations intensive with a small ticket size and fast churn. 

The sanction rate for loans in the SME vertical is 40% and the disbursal rate is 32-33%, which means that out of 100 loan proposals that CSL Finance Ltd gets, only 40 are sanctioned and 32-33 are disbursed. Yields range from 16-19%. Most of these loans are on fixed interest rates because as per management the customer segment in rural and semi-urban India is more comfortable with the concept of fixed EMIs and varying EMIs may confuse them. 

Competition in this segment for CSL Finance Ltd comes mainly from SFBs and NBFCs such as Capri Global, Muthoot, AU Small Finance Bank etc. 

CSL Finance Ltd. Corporate Governance Analysis

• Board Composition – As of FY24, the Board of Directors comprises 6 Directors, with 3 of them being Independent. Amongst the non-Independent Directors are Mr Rohit Gupta, the MD of the company, his daughter Ms Rachita Gupta and Mr Ashok Kathuria, who has been on the Board since 2005. The independent directors are chartered accountants and MBAs who have served as bankers or auditors in their professional capacities. The quality of Independent Directors on the Board seems to be unremarkable. The Audit and Remuneration Committees of the Board were headed by Independent Directors.

• Promoter remuneration – The total remuneration drawn by promoters in FY23 was INR 1.02 Cr in the form of salary, which amounted to 2.2% of the profit after tax of CSL Finance Ltd. There was no increase in remuneration of the promoters in FY23 over FY22.

• Related Party Transactions –  There were no material related party transactions with promoters or entities controlled by promoters in FY23.

• Contingent Liabilities – There are NIL contingent liabilities

• Dividend Policy – Although we could not locate any stated dividend policy of the company, CSL Finance Ltd has been paying regular dividends to shareholders since FY17, without exception, even during COVID-19. The dividend payout ratio started from 3% in FY17 and went up to as high as 15% in FY22 and 11% in FY23. In FY24, CSL Finance Ltd paid 9% of its profits as dividends. 

CSL Finance Ltd Financial Analysis

Over the last 5 years, CSL Finance Ltd.’s AUM has grown at a healthy CAGR of 26% and profit after tax has grown at 21%. Much of this growth has come since FY21, after ILFS and Covid related issues were resolved in the economy. Since FY21, the overall AUM has grown at a CAGR of 46% and profit after tax has grown at a CAGR of 31%. The SME portfolio has grown at a CAGR of 51% from its low base of INR 56 Cr in FY19 whereas the whole AUM has grown at a CAGR of 17%. Throughout this period they have maintained GNPAs below 1% except for a temporary spike during Covid. They’ve consistently generated return on assets in the range of 7-8% per year which places them in the top decile of lenders in India in terms of return on assets generated. Return on equity has been in the 11-13% range due to low leverage. Going forward management has guided to increase leverage to 2.5x from current ~1x. This should increase the return on equity ratio closer to 20%.

CSL Finance Ltd has been a very conservative and risk-aware lender judging by its history. During the ILFS crisis that unfolded in FY19 and extended into FY20, real estate loans were looked at very unfavourably by banks. Liquidity to NBFCs had also dried up as banks were unsure of getting their money back in the prevailing environment. CSL Finance Ltd navigated these twin challenges quite skillfully. In FY19, it focused on collections from its wholesale lending book and slowed down incremental disbursements to the segment. At the same time, it grew the granular SME AUM – which was not facing pressure from banks – 3.5x in the same year. Thanks to the escrow mechanism and the fast turnaround of CSL Finance Ltd portfolio of real-estate projects, they faced no challenges in collections from the wholesale segment and tided over the crisis without any issues at all. 

Similarly, during Covid, they slowed down disbursements in the SME segment and improved their capital adequacy ratio from an already high 66% in FY19 to 79% by end of FY21. Their GNPAs spiked temporarily to 2%+ in FY21 during peak Covid, but quickly settled down to 0.6% by the end of FY23 without any significant credit costs. CSL Finance Ltd currently maintains a provision coverage ratio of 270%.  

Based on the above illustrations, We think it is reasonable to conclude that the CSL Finance Ltd management has a keen sense of risk and they are conservative lenders whose priority is to secure the balance sheet. 

CSL Finance Ltd Comparative Analysis

To understand CSL finance Ltd.’s investment potential, we have conducted a comprehensive analysis. This analysis includes comparing CSL finance Ltd to its competitors (peer comparison), comparing a benchmark index, and comparing sector performance. 

CSL Finance Ltd Peer Comparison

The closest peers of CSL Finance Ltd in terms of lending profile seem to be Five Star Business Finance and Capri Global Capital Ltd. Capri Global has 55% of its portfolio in LAP based SME lending and small ticket construction finance, the same business segments as CSL Finance Ltd. On the other hand, Five Star Business Finance specialises in small ticket business loans (< INR 10 Lakhs) to SMEs and retail secured by residential or commercial property. However both companies are much larger than CSL Finance Ltd with their respective AUMs being 15x and 10x CSL Finance Ltd current AUM. 

Five Star Business Finance seems the best run company among the 3 on all counts but CSL Finance Ltd also doesn’t seem to be too far away in terms of numbers. However, it is important to remember thatCSL Finance Ltd book is only 1/10th the size of Five Star Business Finance’s book and 56% of its AUM comes from construction finance whereas Five Star is 100% into SME lending

CSL Finance Ltd Index Comparison

CSL Finance Ltd share performance vs S&P BSE Small cap Index as the index benchmark comparison is a fundamental tool for understanding the investment potential and making informed decisions in the context of the broader market

CSL Finance Ltd Sector Comparison

CSL Finance Ltd shares performance vs BSE CG as We believe sector comparison helps to differentiate between industry-wide trends and company-specific factors & also helps in executing sector rotation and stock rotation strategies.

CSL Finance Ltd Valuation Ratios

Why you should consider investing in CSL Finance Ltd

We believe that CSL Finance Ltd offers some compelling reasons to track the business closely and to consider investing if one is looking to invest in niche NBFC

1. Good lending track record – In lending businesses, it is very easy to grow fast. But the proof of the pudding lies in a management’s ability to grow fast while maintaining credit quality and recovering payments on time. Throughout its lending history since 2011, CSL Finance Ltd has prioritised credit quality, collections, low leverage and a deep understanding of its customer segments to fast growth across multiple product segments. This has been reflected in pristine credit quality and low defaults in both the wholesale lending and SME lending verticals.
    
2. Conservative nature of promoters – As we have discussed above, the CSL Finance Ltd management steered the company through the challenging IL&FS Crisis and Covid 19 crisis quite smoothly without any significant stress building up on its balance sheet. They slowed down lending preemptively and focused on collections and at the same time reduced their already low leverage to shield the balance sheet. They also maintained adequate liquidity during the ILFS crisis at the cost of a drag on their P&L. They have consistently prioritised balance sheet health in their journey which is a very good sign in a lender.
   
3. When a conservative management guides for strong growth, we take note – CSL Finance Ltd is guiding for 35-40% AUM growth in FY25 and plans to take its leverage ratio to 2.5x from the current 1x in 2 years. This indicates that the management is planning to double the AUM from ~INR 1000 Cr today to ~INR 2000 Cr in 2 years’ time. They’ve also guided to double their branches from 29 to ~60 in 2 years. When a conservative management guides for such strong growth, there are reasons to be optimistic as an investor
    
4. Investments in technology upgrades – In order to grow AUM fast in a granular segment like SME retail lending, CSL Finance Ltd needs to have a very strong technological backbone which will facilitate smooth loan origination, faster sanction and disbursal, quick collection and advanced analytics which can show risk build-up at various granularities of the loan book on time. Without the adequate technology being in place, fast and robust growth in a retail lending segment is not possible.
    
5. Improved credit rating –  CSL Finance Ltd has recently received a credit rating upgrade from BBB+ to A-. An A level credit rating will allow CSL Finance Ltd to access funds from PSU banks. Overall the credit rating upgrade should reduce the incremental cost of borrowing for the company by 50-75 bps.
   
6. Possibility of operating leverage playing out – Since a significant part of the operating expenses for CSL Finance Ltd will be fixed or semi-fixed in nature, there is a good possibility of operating leverage playing out here. Management expects employee costs to go up by ~25% while they expect AUM to grow by ~35-40%. In addition, a bulk of the technology costs seem to have been already invested 

What are the Risks of investing in CSL Finance Ltd

Investors need to keep the following risks in mind if they choose to invest into this business. Risks needs to be weighed in combination with the advantages listed above to arrive at a decision that is optimal for your portfolio construct

1. Macroeconomic risks – Any slow down in the Indian economy may adversely impact the SME segment. Although 99% of CSL Finance Ltd loans are secured by SORP or SOCP, defaults and credit costs may still occur. 

2. Cautious stance from RBI – Over the last year or so, RBI has been consistently warning lenders against lending too aggressively in unsecured retail segments such as microfinance, credit cards, personal loans etc. RBI has also commented on high interest rates being charged by MFIs and NBFCs from their customers in such loans. While CSL Finance Ltd portfolio is neither unsecured, nor very high yield, any adverse action by RBI on lenders in adjacent sectors, may also impact investor sentiment in the secured SME lending segment. 

3. Paucity of low cost deposits in the banking system – Due to various factors like inflation and high fund flows into equity markets since 2021, a lot of savings have moved away from low cost deposits such as Savings bank A/Cs to higher yield deposits such as Fixed Deposits or into the equity markets. At the same time, demand for credit has been strong in the economy. This has caused a fight for deposits in the banking system, leading to pressure on the cost of borrowings for banks. If the cost of borrowings for banks goes up, then their onward lending rates to NBFCs like CSL Finance Ltd are also likely to increase. This can cause pressure on the NIMs of CSL Finance Ltd

4. CSL FInance is yet to see a full cycle in SME lending – CSL Finance started SME lending from 2017. Between 2017-2021, they dealt with the ILFS and Covid crises well in the SME segment. But the SME book was a small % of the overall book at that time (~20%). Strong growth in the segment only started from FY22. Post Covid, there has been a strong lending cycle where most lenders have done well. So in that sense, CSL Finance Ltd is yet to see a full lending upcycle and downcycle with a scaled-up SME book

5. Delay in Suvidha loan scale-up – In Q4 FY24, the management said that it was temporarily slowing down its Suvidha loan disbursements as they were experiencing several on-ground challenges with how the loan accounts and product was behaving during the quarter. They also highlighted challenges in rolling out the Suvidha loan origination and disbursement platform, which required certain tweaks and modifications. The full scale launch of Suvidha has been delayed to Q2 FY25 now. Any further challenges in rolling out can adversely impact the AUM growth target for FY25

CSL Finance Ltd Future Outlook

What makes CSL Finance Ltd quite interesting currently, is that a presumably conservative management is now guiding for aggressive AUM growth led by the SME vertical. Management has said that they are expecting to grow their AUM by 35-40% in FY25 and they expect to increase their branch network by 50% in FY25 and by 100% in FY26. They’ve also guided to gradually increase the debt-equity ratio from the current 1x levels to 2.5x in the next 2 years. A 35-40% AUM growth for 2 consecutive years with an expansion in leverage from 1x to 2.5x, can do wonders for the return on equity ratio, which can inch up closer to 18-19% from the current 13% levels. Of course, while we are quite confident of the conservative nature of CSL Finance Ltd management, their ability to execute fast to grow the AUM is as yet untested. 

Doubling the AUM in 2 years will mean that the physical infrastructure required for on-ground operations and digital infrastructure required for robust and quick underwriting has already been set up and now it is a matter of only sweating it. Over the last few years, there have been significant technological interventions and upgradations at CSL Finance Ltd that management has talked about, for example

• They have moved from a manual data entry based system to a completely automated loan origination and underwriting system with no involvement of paperwork 
• They have introduced a robust underwriting platform with several external API integrations which enables them to do real time credit bureau checks, banking statement analysis, retrieving ITR, GST records, Udyam and Aadhar details in one click
• 93% of their collections are now digital via NACH 
• They are in the process of revamping their loan origination system which will make the origination process much smoother and reduce loan approval turnaround time for customers 
• They have built a dedicated analytics team which generates various dashboards to provide a holistic view of risk to management at various levels 
• As more and more data gets fed into their systems, they hope to be able to use insights from Machine Learning to automatically show deviations and exceptions 

Ms. Rachita Gupta, daughter of the promoter Mr. Rohit Gupta seems to be the person spearheading the technology adoption initiative at CSL Finance Ltd..

CSL Finance Ltd Technical Analysis

We consider technical analysis to be a useful input in taking medium-term investment decisions. Many a time price action tends to lead to fundamental developments; this is too important an aspect to be ignored by retail investors who do not have access to management outside of common forums like investor calls & AGM.

At Congruence Advisers we like to consider both the long-term weekly chart and the daily chart to arrive at a view on price action on this Microcap. Combined with our understanding of fundamentals, we usually end up being better placed to be able to judge both the business cycle and the stock cycle. Playing the stock cycle right is extremely important for investors looking to extract significant alpha over the medium term.

CSL Finance Ltd Price Charts

On weekly charts, over the last 5 years since the Covid lows, CSL Finance Ltd stock has formed a very nice, long upward sloping channel. The price has generally respected the channel except for periods on the downside in mid 2021 and early 2023. Since moving up from the lows of March-May 2023 to 450-500 levels, CSL Finance Ltd stock has been consolidating sideways and hasn’t reached the upper end of the channel in a while.

On daily charts, since forming a bottom in April-May 2023 around 190-200 levels, CSL Finance Ltd broke out in June 2023 and reached 330 levels in 1 month. Then it consolidated in a horizontal band of 310-360 for four and a half months before breaking out again in Nov 2023 and reaching almost 500 levels by the year end. Since then CSL Finance Ltd stock has again started consolidating in a horizontal band between 400-515. Since breaking out from the May 2023 lows, CSL Finance Ltd stock  has generally respected 100 EMA levels, breaking them only during broader market corrections such as those in March and May-June 2024. Even during these deeper corrections, CSL Finance Ltd stock  has respected 200 EMA levels. The next up move is likely to happen when the upper end of the horizontal band (515) is broken convincingly with volumes. This is likely to happen when the market gains confidence about CSL Finance Ltd ability to deliver on its target of 35-40% AUM growth for FY25. Until such time, CSL Finance Ltd stock may keep consolidating in this channel. The lower end of the channel should act as support in the near term. 

CSL Finance Ltd Latest Result, News and Updates

Q4 FY24 was a strong quarter for CSL Finance Ltd with a 9% QoQ and 39% YoY AUM growth. Q4 saw a total disbursement of INR 322 Cr, a 118% YoY increase in disbursement. The SME vs wholesale AUM mix moved further in favour of the SME segment at 44%:56% vs 40%:60% a year ago. Collection efficiency remained strong at 99%. On a quarterly run-rate basis, return on average equity reached 17.8% and credit cost was 0.5%. GNPA and NNPA continued to be low at 0.44% and 0.25% respectively and Provision Coverage Ratio continued to remain high at 270%. 

Final thoughts on CSL Finance Ltd Share Analysis

We believe that the lending sector in India is interestingly poised, things are different compared to the previous periods where system credit growth average above 15% p.a. In the run up to 2011, corporate India was hungry for debt capital and gross fixed capital formation was driven by aggressive bank credit. Following the corporate NPA cycle, most large banks focused on granular, retail lending and stayed away from sub AA credit lending for many years.

The lending cycle today has a different flavor where corporate India has healthy balance sheets and hygienic leverage. Many of the larger and credit worthy businesses are funding a big chunk of their capex through internal accruals rather than tapping aggressively into lending channels. Within the real estate sector, land bank acquisition slowly gave way to the JV route which kept leverage under check. Within the SME segment though, the situation has been dicey post the 2018 NBFC crisis. There are many pockets within the SME segment for focused NBFC’s to build a lending book based on prudence. Some of these niches can turn out to be profitable lending segments which are quite some distance away from large banks. For this reason, we believe that niche lenders can have decent run for a few years until the credit environment starts to tighten up.

CSL Finance Ltd presents an opportunity in this context where the management has demonstrated clear focus on the pockets and geographies they want to be active in, a respectable track record of prudent underwriting at limited leverage. Now that the management has zoned in on a template that is working well, aggressive AUM growth at higher leverage can move the needle significantly over the medium term without diluting the core focus of the business. This is the equivalent of a startup that has a proven product market fit and products that have seen acceptance by the target segment, now wanting to raise capital specifically for customer acquisition and scaling. In such a situation, increased scale can come rather quickly without affecting the core unit economics of the business. Majority of the growth can be value accretive and not value dilutive.

Investors will need to do their own independent work on assessing the risks in the business and choose what valuation they would like to participate at. Assessment of risks is more important than potential growth in a lending business, unlike other operating businesses that do not have similar balance sheet risks.

Disclaimer – This note is part of a business research & analysis series on small companies, there is no BUY/SELL recommendation or target price issued as part of this. There is no assurance that this stock makes for a good investment, there is no guarantee that this stock will be included in the coverage universe of Congruence Advisers. The note contains some forward-looking statements and insights drawn from the historical results, annual reports and investor presentations; they are to be viewed only within this context and not as a prediction of future performance of the business or the stock covered.

While due care has been taken to ensure that the information here is as accurate as possible, Congruence Advisers disclaims any liability in case of any unintentional inaccuracies. 

The content does not constitute investment advice.

Disclosure (Updated as of Sep 30, 2024) – No position in the stock