Cholamandalam Investment & Finance Co Stock Research Report

STRONG GROWTH ACROSS KEY PARAMETERS…

Cholamandalam Investment & Finance Company Ltd. (CIFC) is the financial services arm of the Murugappa Group. CIFC commenced business as an equipment financing company and has emerged as a comprehensive financial services provider offering vehicle finance, home loans, loan against property, SME loans, Secured Business Personal Loans (SBPL), Consumer & Small Enterprises Loans (CSEL) and a variety of other financial services to customers. Chola operates from 1309 branches across India.

Key Rationale

◼ Asset Quality deteriorates in Q2; H2 outlook better:

CIFC’s slippages in Q2FY25 were ~Rs 600 Cr, of which Rs 300 Cr were from the Vehicle Finance (VF) book. H1FY25 witnessed deterioration in VF asset quality owing to heatwaves, extended monsoons, and delayed harvesting. However, the management expects the trends to reverse in H2FY25, with Q3FY25 trends stabilizing and the company witnessing an improvement in Q4FY25 (seasonal phenomena). The delinquency levels in the used and new CVs are currently at similar levels. Similarly, with the SME book maturing, credit costs are expected to remain higher in H1FY25; however, management anticipates that these costs will taper going into H2FY25 due to SARFAESI. On an overall basis, the management expects the credit costs to improve in H2FY25 (and settle at ~1.3-1.4%)

◼ NIMs to remain range-bound:

CIFC’s borrowing mix is skewed towards bank borrowings which constitutes ~45% of the total borrowing mix and the company would continue to maintain it at current levels. Of the total bank borrowings, ~50 60% are EBLR linked, 10% are fixed rate, and the balance is MCLR linked. The management expects some yield improvement in the fixed-rate portfolios. The management also indicated that the company will look to maintain yields in the home loan portfolio as it forays into newer geographies. Thus, margins are expected to remain steady between 7.4%-7.5% over FY25-26E.

◼  AUM growth to moderate and settle at ~25%:

CIFC indicated that the company is planning on slowing down the pace of disbursements as it aims at pruning growth to ~25-28% in FY25 vs 33% currently. That said,CIFC’s disbursements in Oct’24 have been better vs. Sep’24 across most segments and H2FY25 disbursement momentum is expected to be better than H1FY25. Similarly, the disbursements in the VF segment are expected to improve in H2FY25, with VF AUM growth ranging between 18-20% in FY25E. Moreover, LAP and Home Loans will continue to maintain their growth momentum. CIFC continues to diversify its product basket by adding new products across segments. The management has also indicated that it will look to cap the share of unsecured businesses at ~10% over the medium term vs. 8% currently.

◼  Outlook & Valuation:

CIFC continues to eye pre-tax RoTA of 3.5% over the medium term, while FY25 RoTA could range between ~3.2-3.3%. We expect CIFC to deliver RoA/RoE of 2.3-2.5%/20-23% over FY25-27E.

◼ Key Risks: a) Moderation in growth momentum, b) Inability to scale up new products and c) Asset quality concerns cropping out

Key Financials (Standalone)