IGI Logo

Beefing-up buffer to cushion earnings; positioned to grow when normalcy returns

Cholamandalam Investment’s (Chola) Q4FY21 earnings surprised on few counts: 1) Despite retracement in collection efficiency, stage-2/3 went up QoQ (crossing 10% mark); however restructuring of ~2% was categorised as stage-2 assets; 2) its stance of creating further covid buffer of Rs3.5bn (against its Q3FY21 guidance of consuming the buffer); and 3) elevated employee cost of Rs2.7bn (vs Rs1.6n quarterly run-rate).

What helped offset this drag was sustained business momentum (14% AUM growth) and consistently declining funding cost. The way we read the earnings and the management’s narrative – it is cautious of the second wave impact with visible (lower) disbursement/collection trends in Apr/May, but has created a cumulative provisioning of 3.6% to cushion earnings volatility.

Strengthening its market positioning in tractors, cars, LCV, CE etc and investing in LAP segment can help lever opportunities when normalcy returns. Chola exiting FY21 pandemic with 7%-plus NIMs, <2.5% cost to assets, ~2% of credit cost and 17% RoE reinforces confidence on delivering 18-20% RoE profile over the medium term. This can help it command valuations at 3.75xFY23E book. We upgrade the stock to ADD (from Hold) with a revised target price of Rs617 (earlier: Rs465).

* Stress pool (stage-2/3) crosses 10%; includes restructuring pool as well:

Stage-3 inched up QoQ from 3.75% to 3.96% primarily led by stage-3 vehicle financing at 3% (2.8% in Q3FY21), home equity at 7.25% (7.3%), and home loan at 3.2% (3.8%). Stage-2 pool too has risen from 5.24% to 6.2% - of the Rs42.5bn, vehicle financing constitutes Rs35bn (>7%). This compares with pre-covid average stage-3 at 3.0-3.5% and stage-2 at 3.5-4.0%. This suggests stress was elevated to the extent of 3-4% due to covid first wave pandemic. Management hinted it equally worries about the disruption in the second phase as it was in the first phase.

* Collection efficiency retraced in March, but dipped in April amidst disruption:

Vehicle finance collection efficiency (CE) retraced from 103%/105%/108% in Oct/Nov/Dec, respectively to 116% in March (of Rs21.2bn of billing, it could collect Rs24.6bn). Cumulative CE (on collectible pool of Rs21.2bn of March billing and Rs18.8bn of other dues) thereby, settled at 62% (as it collected Rs24.6bn). Early bucket CE was 98.6% in March with roll-forwards being 1.4%. However, management indicated CE in April has been hampered due to the second wave – it collected Rs19.7bn on the same collectible pool implying 93% vehicle finance CE. Cumulative CE thereby, tends to be down to 50% and in early buckets roll-forwards have increased to 4.57% (95.4% CE). Also, the company is not actively resorting to repossession in current circumstances unless it is intentional or has business viability issues.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer