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Cholamandalam Investment and Finance (Chola) has in the past stood out among peers in terms of business performance across cycles. The most prominent driver for that outperformance was the ability to grow most in a CV upcycle (26% vehicle AUM CAGR during FY16-FY19 vs 13% / 17% / 17% for Shriram Finance / MMFSL / Sundaram, respectively) and it has yet again done the same in FY23 (27% for Chola vs 15% / 23% / 22% for Shriram Finance / MMFSL / Sundaram). However, the prominent addition to company’s strategy this time is a much wider and aggressive diversification foray (30% AUM CAGR in non-vehicle finance business during FY19- FY23 vs 3% / 6% for MMFSL / Sundaram), which adds to the business salience.

* Maintain ADD with a revised target price of Rs1,022 (earlier: Rs793) based on FY25E 4.0x P/B (earlier:4.0x FY24E) for the standalone business. We factor-in 27% AUM CAGR for FY23-FY25E with ‘NIM to AUM’ of 6.6% each year for FY24E/FY25E, respectively, compared to 6.8%/6.7% in FY22/FY23. We model ‘opex to AUM’ ratio of 3.0%/2.9% in FY24E/FY25E. This results in RoE of 20.2%/20.8% for FY24E/FY25E vs the FY23 RoE of 20.5%. Having said that, we remain cautious about strong growth witnessed in the new segments (>5x YoY AUM growth), hence we are building-in a slight increase in credit cost to 1.1%/1.2% for FY24E/FY25E vs 0.9% in FY23. NIM compression continues to be a headwind given the ~68% fixed-rate asset book. Nevertheless, business target remains 3.5% PBT ROTA (3.7% in FY23).

* Robust Q4FY23: Strong AUM growth (11.6% QoQ), stable NIM (~7%) in a rising interest rate environment, and improved asset quality [gross stage-3 assets (GS-3) of 3.0% vs 3.5% in Q3FY23] ticks all the boxes for a very strong Q4FY23 for Chola. Consequently, PPOP grew 18% QoQ (also aided by opex moderation). This, coupled with lower credit cost, led to a strong 24.6% QoQ growth in PAT.

* Strong broad-based disbursement growth: Disbursements grew 20%/65% QoQ/YoY to Rs210bn in Q4FY23. Chola has now reported its highest-ever quarterly disbursements for the fifth consecutive quarter. Sequential disbursements growth was driven by home loans (31% QoQ growth), new business segments (SME, CSEL, SBPL) which grew 23% QoQ, and LAP (22% QoQ growth) while vehicle finance grew 17% QoQ.

* AUM mix to shift away from vehicle finance over the medium term: Management has maintained its AUM growth guidance of 20-25% going forward. Furthermore, it is envisaging an AUM mix of 50%/35%/15% between vehicle/LAP and home loan/new business over the next 2-3 fiscals from 63%/28%/9% as of FY23, respectively. This would mean AUM CAGR growth of 14%/32%/46% for vehicle/LAP and home loan/new business during FY23-FY26 assuming 23% CAGR in total AUM between FY23 and FY26.

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