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Successful execution of “Expanding Horizons” strategy will cement high multiples

Cholamandalam Investment’s (Chola) main narrative in FY23 and possibly in near future will be that of “Expanding Horizons”. This is amply reiterated in its FY22 annual report (link). While diversification cuts across as a common business strategy for vehicle financiers, Chola possibly outperforms peers in presenting more concerted efforts and outcomes like (1) already significant progress (12% of total disbursements in Q4FY22) in new segments, (2) complementary acquisitions like Payswiff and (3) stress on building complementary organic skill through analytics appropriate to new segments like Acquisition Scorecard, early warning models and also requisite hiring. The company stresses on “ambitious growth plans for FY23”. Successful execution of these strategies will cement the high multiples (3.5x 1 year forward P/B vs 1.5x average for other major listed vehicle financiers) enjoyed by the company. The combination of CV up cycle and well drafted new segment strategy does offer earnings tailwinds in FY23. Risks include high inflation leading to low demand and less-than-optimum outcome in new segments.

FY22 has been a year of “Expanding Horizons” for Chola.

Chola extended beyond traditional segments and explored new horizons to cater to the changing needs of customers. It launched two new businesses, consumer and small enterprise loan (CSEL) and secured business and personal loan (SBPL). It acquired Payswiff Technologies and also invested in Paytail Commerce to participate in the fintech space. With focus on endto-end digitisation, Chola continues to push digital transformation at the forefront.

The strategy has merit considering that the overall growth in non-vehicle segment has been much higher than vehicle.

While the actual growth in FY22 or estimated growth in FY23/24 is strong for vehicle segment, the meagre 14% CAGR between FY18- 22 and the inherent cyclical nature of vehicle finance does warrant need for diversification. This is illustrated by the fact that growth in other segments has been better for Chola as LAP/home loan AUM grew at 14%/52% CAGR during FY18 to FY22, respectively.

New initiatives aim to provide a complete ecosystem for consumer and small enterprises beyond reach of formal credit yet.

The CSEL segment will offer unsecured loans to salaried/self-employed professionals and micro and small enterprises through term and flexi loans. The SBPL segment will offer secured loans on the basis of credit assessment and cashflow projections and will target new-to-credit customers primarily in tier II/III cities. The SME segment will help working capital and capex requirements of SMEs. All these segments (except SBPL) will work through a combination of traditional and new age fintech partnerships. The acquired Payswiff Technologies (PAYSWIFF) complements the same as it is engaged in the business of enabling online payment gateway services for e-commerce businesses and provides ecommerce solutions.

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