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Non-VF businesses aiding growth and quality

As challenges in vehicle finance (CV; 55% of AUM) and unsecured business segments remain pressing, Cholamandalam Investment and Finance’s (CIFC IN) Q3 earnings saw sticky elevated credit costs and NPAs returning to year-ago levels of 4%. Said that, business performance was robust at 30.5% AUM growth as non-CV businesses, largely led by LAP, long-tenure SME and selective CSEL, nurtured growth. While VF has remained under stress for two long years with challenges in 9MFY25 intensifying, operating leverage and steadying credit costs will anchor the earnings ahead. We upgrade CIFC to Accumulate from Reduce given the recent correction in the stock but maintain our premise of expensive valuations amidst tough environments.

Steady performance at core; provisions sticky:

Q3FY25 PAT of INR 10.9bn (+12.8% QoQ/24% YoY) was led by healthy NII (INR 34.3bn, +8.4% QoQ), lower opex (C/I improving 72bps), and stable credit costs (~1.6%). AUM growth was healthy (+6% QoQ) to INR 1.74tn, with strong disbursements in VF (+17% QoQ). Despite slight yield compression in HL, margins improved (+18bps QoQ), supported by strategic shifts in the self-employed segment. Asset quality saw stress with GNPA rising to 4%, but early delinquencies are showing improvement. The company is on track towards its 25% growth target, bolstered by strong disbursements, ongoing regional expansion, stronger focus on collections and optimizing operational efficiencies.

Non-VF businesses continue to aid growth:

Disbursements in Q3FY25 rose 6.1% QoQ and 15.3% YoY to INR 258bn, led by a 16.7% QoQ rise in VF, supported by stronger demand for small-CV and LCV. New businesses (CSEL, SBPL, SME) saw an 8% QoQ drop, though recovery is expected. AUM grew 6% QoQ/30.5% YoY to INR 1,746bn, led by LAP (+7.9% QoQ) and HL (+7.7% QoQ). Despite macro challenges, CIFC expects gradual improvement, particularly in VF and SME segments, in the next 3-4 quarters, led by better capacity utilization, expansion into non-South markets, and productivity gains that will support growth, prompting us to maintain a 25% AUM CAGR for FY24-27E.

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VF stress impacts headline NPA; underlying AQ trends improving:

Asset quality deteriorated with GNPA at 4% (+22 bps QoQ), dragged by stress in small commercial vehicles, used vehicles, and tractors, though recovery is beginning. CSEL Stage 3 spiked 27bps QoQ, prompting CIFC to reduce partner exposure. Gradual improvement is expected in 3-4 quarters, with VF NPAs normalizing and CIFC winding down smallticket, short-tenure loans. We maintain our GNPA estimates at 3.5% and expect credit costs to remain sticky at 1.4% in FY24-27E.

Upgrade to Accumulate post recent correction:

We slightly adjust FY25E EPS to account for sustained credit cost pressure in the VF business. After downgrading CIFC to Reduce in Q1 as positives were priced in, we now upgrade it to Accumulate following recent corrections. This reflects confidence in CIFC’s consistent strategy balancing asset quality and profitability. We expect a healthy 25% CAGR, with operating leverage mitigating elevated credit cost (1.4-1.5%), leading to a 2.4-2.5% RoA and 22-23% RoE for FY24-27E. Our TP is unchanged at INR 1,434, on FY27E P/ABV of 4.1x.

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