Add Cholamandalam Investment and Finance Company Ltd For Target Rs. 620 - Yes Securities
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Result Highlights
* CIFC carried forward its strong growth momentum into the Q4 FY21 ‐ AUM growth accelerated to 16% yoy on the back of robust 42% disbursement growth. Vehicle Finance (VF ‐ 72% of AUM) disbursements grew 31% yoy, while originations doubled in LAP (22%) and Home Loans (6%).
* Within the VF segment, while incremental growth became more broad‐based with revival in HCV business, the strong traction in LCVs, Used Vehicles, Cars, Tractors and Construction Equipment continued. CIFC gained further market share in Tractors and Construction Equipment, and has maintained its market position in most of the other products.
* Due to interest reversals from slippages and interest refund, the NIM came‐off sequentially despite 20 bps reduction in the cost of funds.
* As the company distributed annual increments and incentives in Q4 FY21, the higher employee cost caused a significant decline in PPOP.
* Restructuring stood at near 2% of AUM, comprising mainly of loans from VF segment (CV and Bus operators both); and these loans were prudentially classified as Stage‐2 assets. There was a mild 20 bps increase in Stage‐3 assets. ECL cover on both Stage 2 & 3 assets was maintained at elevated levels (2x of normal times).
* Credit cost was higher in Q4 with co. making additional provisions of Rs3.5bn in the light of second wave; overall management overlay stood at Rs11bn (1.5% of AUM).
Our view –
Best play in vehicle finance; but higher valuation and second wave uncertainties could weigh on near‐term stock performance: A strong market position, large rural presence, diversified product portfolio and proven growth execution make CIFC the best play in vehicle finance space.
As demonstrated in the first wave (16% AUM growth and 44% earnings growth in FY21), we believe that company will overcome the headwinds from second pandemic wave (has a large provision buffer). We expect 25%+ earnings CAGR on 16‐18% AUM CAGR over FY21‐24, as RoA reaches 3% on normalization of credit cost. We remain structurally positive on the stock, but high valuation (3.7x FY23 P/ABV) could cap upside in the coming 3‐6 months. Retain ADD rating.
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