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Stress pool moderates a tad; mere 30bps credit cost buoys earnings

Cholamandalam Finance’s (Chola) stress pool in Q2FY22 moderated a tad with stage-3 pool at 6.16% (vs 6.79% QoQ) and stage-2 assets at 12.68% (vs 14%) including restructuring of 6.85% (5.58% under OTR 2.0). Stress levels are higher compared with pre-covid average stage-3 at 3.0-3.5% and stage-2 at 3.5-4.0%. With improved collection efficiency of 114%/115%/116% in Jul/Sep/Oct, trajectory is clearly on a decline, but will take some time before it normalises. Credit cost of 30bps buoyed earnings. This was partially offset by higher opex/AUM at 2.9%. Disbursements, after a plunge, rebound with 35% YoY growth, and AUM was up 3% QoQ. We model AUM growth of 11%/18%, credit cost of 1.9%/1.4% for FY22E/FY23E. RoA/RoE of 3%/20% by FY23E will help Chola command valuations of 4.25x FY23E book. Maintain BUY with revised target price of Rs703 (earlier: Rs617).

* Stress pool (stage-2/3) including restructuring pool at ~18.8% (vs 20.8% QoQ): Stage-3 assets moderated a tad to 6.16% (vs 6.79% in Q1FY22) with stage-3 in vehicle financing being at 5.73%, LAP at 8.18% and home loans at 4.29% (4.19%). Stage-2 assets too came off to 12.68% (vs 14.03% QoQ) due to improved roll backs. However, incremental restructuring of 1.4% is now classified in stage-2 that capped this pool decline. Management highlighted it will take some time before the stress pool normalises to pre-covid levels. Collection efficiency (CE) in October is back to March levels of 116% and is consistently improving from 84%/103%/114%/115% in May/Jun/Jul/Sep), respectively. This suggests forward flows into stage-2/3 will be contained. Roll forward from stage 0 to stage 1 was relatively higher at 1.75% due to floods in few states compared to 1.45% in July. Also, the company is not actively opting for repossession and was at the same level as Q1FY22.

* Credit cost at mere 30bps; 22% provisioning coverage on overall stress pool: Earnings were buoyed by mere 30bps credit cost of Rs580mn, significantly lower than I-Sec expectations. It carries provision coverage of 36.45% (vs 35.51%) on stage-3 assets and 13% (vs 12.51%) on stage-2 pool. It holds management overlay provisions of Rs7bn and created additional provisions on restructured loans. Cumulatively, provisions are equivalent to 4.09% of AUM (vs 4.37%), covering 22% of the stress pool. Management indicated it will continue to carry Rs2.5-3.0bn of overlay provision and will utilise only the balance as and when it is confident of no further challenges of covid pandemic. It also guided for credit cost being contained at similar levels in H2FY22 with overall stress pool itself coming down. We conservatively model credit cost of 1.9%/1.4% in FY22E/FY23E, respectively.

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