Update on Cholamandalam Investment & Finance Ltd by Motilal Oswal
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Strong disbursement volumes and healthy collection efficiency
Momentum in new product lines ahead of the management’s guidance
* Disbursements rose 58% YoY and 22% QoQ to INR127.2b in 4QFY22 (est. INR120b). CIFC reported a healthy (15% QoQ) growth in Vehicle Finance and strong disbursements (INR15.1b) in the new product lines (est. INR13b).
* Disbursements rose 36% YoY in FY22, led by 26%/53%/23% YoY growth in Vehicle/LAP/Home loans. It reported INR26.2b in disbursements in new product lines in FY22.
* Collection efficiency improved 18pps YoY to 138% in 4QFY22 (v/s 120% in 4QFY21). The management commentary suggests that this should lead to strengthening of asset quality. We believe the management has been conservative in provisioning and is well provided for. We estimate benign credit costs (~INR1.75b) in 4QFY22.
* Liquidity position normalized in 4QFY22, with INR55.8b of cash equivalents, INR18.2b of undrawn sanctioned lines, and total liquidity position of INR74b at the end of Mar'22. This normalization in its liquidity position suggests that the negative carry from excess liquidity will further reduce and translate in a further improvement (albeit minor) in spreads/margin.
* We have always felt very strongly about CIFC as a franchise, owing to its ability to play different credit cycles better than its peers. Time and again, we have reiterated the strength of this franchise. Strong disbursements in 4QFY22 and healthy collection efficiencies vindicate our stance that CIFC is among those few NBFCs which are best positioned to demonstrate high loan growth as well as pristine asset quality (COVID stress notwithstanding).
* CIFC is well-diversified across product segments as well as geographies. It has delivered the best asset quality among peers across credit cycles as well as in times when the external environment has been tough. We expect credit costs to moderate to 100-110bp (of average AUM), with 19% loan CAGR over the next two years.
* It can deliver 3% RoA and 20% RoE from FY23E onwards. The stock trades at 4.1x FY23E P/BV and 22x P/E. We maintain our Buy rating with a TP of INR850/share (for a potential upside of 24%).
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