Buy Cholamandalam Investment & Finance Ltd For Target Rs.530 - Motilal Financial
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Healthy operating performance
* Cholamandalam Investment and Finance Company (CIFC) reported 5% YoY growth in PAT to INR4.1b (in-line). Operating profit grew 51% YoY, 11% above our expectation. However, higher-than-expected provisions (INR4.45b v/s INR3.5b) drove PAT in-line.
* We revise our topline and credit cost estimates for FY21/FY22E; as a result, our EPS is upgraded by 9%/18% for FY21/FY23E. Maintain a Buy rating.
Disbursements improve across products; higher focus on Used Vehicles
* From 13% YoY decline in 2Q, disbursements grew 6% in 3QFY21, led by ~40% growth in LAP and MSME disbursements. ECLGS disbursements were INR15b in the quarter (VF – INR11.62b, LAP – INR3.84b).
* Vehicle Finance (VF) disbursements were marginally above YoY levels at INR61b. Over the past 2–3 quarters, the company has almost stopped HCV disbursements – its share in VF disbursements now stands at 2–3%, from 15–18% a couple of years ago. The share of Used CV and Refinance disbursements has risen to 40% from 28–30% over this time period.
* AUM grew 2% QoQ / 13% YoY to INR687b. The overall product mix remained largely unchanged, with the share of VF/LAP at 73%/21%.
Spreads improve 40bp QoQ – a multi-quarter high
* Yield on loans compressed 20bp QoQ to 15.5%. Do note that this is on a high base. The company benefited significantly from lower cost of incremental funds, with CoF declining 60bp QoQ to 7.4%. Spreads, at 8.6%, were the highest in the past several quarters.
* The borrowing mix remained largely unchanged, with the share of bank loans at 60% and that of NCDs at 13%.
* Opex remains well-managed despite disbursements normalizing and the focus on collections. Opex fell 13% YoY to INR3.7b.
100bp increase in proforma GNPL ratio; building provision buffer
* The proforma GNPL ratio increased 100bp QoQ to 3.8%. Stage 2 loans stood at 5.2% v/s 2.9% QoQ. Stage 1 loans include 1.6% restructured loans as well.
* CIFC shored up its Stage 1 and 2 provisions by ~50bp to 2% and Stage 3 provisions by ~200bp to 45%.
Key management call highlights
* Collection efficiency (CE) against billing demand: Sep – 87%, Oct – 103%, Nov – 105%, Dec – 108%
* Proforma GS3 ratio: VF – 2.78%, LAP – 7.3%, HL – 3.8%
Valuation and view
Recovery in disbursements in 3QFY21 is encouraging. The company has been gaining market share across product segments. We expect CIFC to deliver AUM growth in the low-to-mid teens in the medium term. The margin should expand given lower cost of funds and reduced liquidity on the BS. The 100bp QoQ increase in the proforma GNPL ratio is commendable in the current environment. We upgrade our FY22E EPS estimate by 18%. Maintain Buy, with TP of INR530 (3.0x FY23E BVPS).
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