Moving ahead steadily
* Cholamandalam Finance’s (CIFC) Q4FY17 performance was better than expected despite transitioning to 90-dpd NPL recognition; Vehicle finance division delivered strong performance while home equity segment witnessed a subdued quarter
* Gross NPLs rose to 4.7% on 90-dpd NPL recognition basis as against 3.8% in Q3FY17 on 120-dpd NPL recognition; On a like-to-like basis, GNPLs at 90-days recognition improved for vehicle finance biz, while it worsened for home equity segment
* AUMs grew 15% yoy (+4% qoq) to Rs342bn, with vehicle finance (VF) segment being the growth driver (VF AUM +18% yoy and +7% qoq); Disbursements in the HE segment dropped sharply by 45% yoy as management continues to maintain cautious approach
* We upgrade our earnings estimates for FY18E/19E by 2%-3% and believe with the regulatory overhang behind now, CIFC is on a steady growth path. Improvement in HE performance key to improvement in return ratios. Maintain ACCUMULATE
* Regulatory overhang behind as transition to 90-dpd complete:
CIFC’s gross NPLs inched up to 4.7% from 3.8% in Q3FY17 (at 120-dpd NPL recognition) as the company transitioned to 90-dpd NPL recognition. Consequently, the annualized credit costs for the quarter came in at 0.63% vs ~1.1% for 9MFY17 period. The management also increased the standard asset provisions to 0.4% and hence all the regulatory requirements until FY18 have been fulfilled. Within segments, vehicle finance business witnessed reduction in NPLs on a qoq basis at 90-day recognition. Meanwhile, the asset quality in the home equity business worsened during the fiscal. Going forward, management expects asset quality in the HE business to improve, which could result into lower provisioning costs.
* Vehicle finance business growth picking up:
Total AUMs grew +15% yoy/+4% qoq to Rs342bn mainly led by a +18% yoy/+7% qoq growth in the VF AUMs. VF Disbursements remained strong as it grew 26% qoq to Rs44bn. Importantly, growth in the HE segment remained subdued as the management continues to adopt a cautious stance. HE disbursements fell 45% yoy/-12% qoq. Going forward, the management has guided for ~20% AUM growth mainly led by continued strong growth in the vehicle finance business and some uptick expected in the home loans business with the HE segment.
* Opex remains elevated:
Opex during the quarter grew 32% yoy and stood at 3.3% (annualized) of average AUMs as against average 3.1% for the 9MFY17 period. Higher opex can be partially attributed to addition of ~170 branches during FY17 and certain technology related costs. Going forward in FY18, the management expects the benefits of operating leverage to kick in as a large part of the technology spends are behind now coupled with non-recurrence of certain one-off costs incurred during the year gone by.
* NIMs improve despite 90-day NPL recognition:
CIFC’s calculated net interest margins expanded 41bp qoq to 7.9%, despite transition to 90-dpd NPL recognition. Sequentially, the cost of funds dropped 18bp qoq as the company continues to shift the borrowing mix in favour of relatively low cost market borrowings.
* Valuation and view
We upgrade our earnings estimates for FY18E/19E by 2%-3% and believe with the regulatory overhang behind now, CIFC is on a steady growth path. We model in AUM CAGR of ~20% and average 2.6% ROAs and ~20% ROEs over FY18-19E but do not build in any capital infusion at this point of time. We believe CIFC remains better placed than its peers on account of its diversified portfolio and tight controls on asset quality. We expect CIFC to be well positioned to gain market share as economic growth gathers momentum. Improvement in HE performance key to improvement in return ratios. We maintain our ACCUMULATE rating with a revised target price of Rs1,350 at which the stock will trade at 3.5x FY19E BV.
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