Add Cholamandalam Investment & Finance Ltd For Target Rs. 580 - Yes Securities
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Our view ‐ Swift recovery in collections and transient nature of stress pool comes to rescue
Chola (CIFC) missed our Q1 FY22 PAT estimate by 35% due to lower disbursements and sharper‐than‐anticipated increase in PAR 30 which mandated higher provisions. PAR 30 increased by 11 ppt qoq to 21% of loan portfolio, though bulk of the bulging was in Stage‐2 (8 ppt increase from 6% as of March). Restructuring 2.0 was 3.9% of loan assets, and cumulative restructuring increased to 5.4%. Restructuring was principally in the form of 2‐6 months moratorium; about 70‐80% of the cases were 1‐ 2 months moratorium while longer moratorium was for customers from more impacted segments. ECLGS portfolio remains largely unchanged (<3% of AUM) with negligible disbursements in Q1 FY22.
After swiftly recovering to 101% in June, the collection efficiency improved further to 114% in July (similar to March); implying that normalization and roll‐back activity in the overdue buckets has started. Management expects to fully reverse the increase in PAR 30 within the fiscal, and thus estimates a much lower credit cost than FY21 (2%). Overall disbursements have recovered strongly in July, stood even higher than July 2019. CIFC is confident about growing 5‐10% above the market in vehicle finance segment (71% of AUM). NII growth was robust in Q1 FY22 at 39% yoy, aided by 20 bps qoq decline in funding cost. With restrained cost growth, the PPOP growth was even higher at 56% yoy.
While the extent of portfolio movement in Q1 FY22 came as a negative surprise, the evolving collection picture and transient nature of the stress pool provides comfort on the likelihood of substantial bucket corrections and lower credit cost in ensuing quarters. We retain ADD rating on the stock, and the reduction in price target to Rs580 reflects the modifications to our growth and credit cost assumptions for FY22.
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