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Robust performance and commentary drive significant earnings upgrade

Chola’s earnings were 2% above our expectation, but it delivered a significant 11% beat on PPOP aided by 20 bps NIM expansion (v/s expectation of marginal decline) and controlled opex growth (6% below estimate). PPOP growth was stronger than AUM
growth at 18% qoq/40% yoy. Strong collections (controlled flow fwd. and consistently higher roll backs) drove significant decline in Stage-2 and Stage-3 assets.

Key management comments were 1) AUM growth of 22-25% pa in coming years with new products’ (SME, CSEL and SBPL) contribution reaching 15%, 2) maintaining NIM near current level along with competitive product pricing, 3) keeping Opex/Avg. Assets around 3% despite scaling-up new products, 4) credit cost being at the lower end ofcross-cycle band of 0.8-1.2% in the current year and 5) overall RoA further improving in longer run with increasing profitability of new products.

The overall robust performance in Q4 FY23 and enthusing management commentary has driven 15% upgrade in our FY24/25 earnings estimates. We have raised growth and margin assumptions, and calibrated credit cost estimate. We estimate avg. RoE
delivery of 22.5% over FY23-25 without assuming any capital raise. With no material RoE risks visible currently, the stock can continue to trade at higher valuation multiples. Retain ADD rating with increased 12m PT of Rs1075.

Impeccable execution on growth continues
The AUM growth of 11.6% qoq/38.5% yoy was stronger than expectations, supported by portfolio run-off being lower than estimate. Disbursements were up 20% qoq/65% yoy, led by strong business momentum across businesses and products. Vehicle finance originations were up 17% qoq/39% yoy with the co. continuing to gain market share. Home Equity disbursements were up 48% yoy and Affordable HL/LAP originations were up 156% yoy. New products (SME, CSEL and SBPL) disbursements grew 23% qoq and formed 22% of co.’s overall disbursements (9% of AUM).

Margins and opex intensity surprise positively
NIM improved by 20 bps qoq on portfolio yield increasing by 40 bps (rate hikes taken + robust disbursements) and BS liquidity coming down. Lesser-than-expected increase in CoF, despite bank loans constituting 60%+ of borrowings, reflected negotiated
reduction in credit spreads. Moderate growth in opex by 5% qoq/21% yoy, in the context of substantial origination activity, was on account of productivity/efficiency gains in Vehicle Finance and LAP businesses.

Delinquency buckets improve; Stage-3 provisioning strengthened
In absolute terms, Stage-2 and Stage-3 loans declined by 16% and 4% respectively on qoq basis. In % terms, these buckets declined from 4.9%/3.5% as of Dec to 3.7%/3%, depicting controlled flow rates across delinquency buckets. Loan write-offs were likely <Rs1bn v/s ~Rs2bn in Q3 and ~Rs2.5bn in Q2. ECL coverage on Stage-3 assets was raised significantly from 41% to 46%. The provisioning was strengthened in Vehicle Finance and LAP portfolios.

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