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Almost stable spreads and strong asset quality; disbursement growth decelerates as expected

Chola’s core NII (ex. of Fees) and PPOP came in-line with our expectation while PAT was 3% lower on slightly higher credit cost. AUM growth remained strong at 7.7% qoq/40% yoy even as disbursement growth decelerated to 4% qoq/27.5% yoy. HL originations were flat qoq whereas disbursements in New Businesses (CSEL, SBPL & SME loans) have been nearly stagnant over the past three quarters.

Reported Net Income Margin was flat qoq at 7.4% at co. level, and it improved by 20 bps in VF and 100 bps in HL business segments on the back of Income Yield improvement of 50 bps and 110 bps respectively. Overall CoF increased by only 10 bps qoq. There was a significant jump in fee income with addition of insurance distribution commission after receipt of license in October. Opex/Asset ratio increased 10 bps sequentially across VF, LAP and HL businesses, reflecting strong business/disbursements activity and significant distribution/manpower addition in recent quarters.

In absolute terms, Stage-2 loans rose by 2.5% qoq and Stage-3 loans increased by 2.5% qoq/13% qoq net/gross of write-offs. Notably, the net fwd. flow rate across buckets has been consistent over the past three quarters including the write-offs. Stage 2 & 3 combined has been 6.8%/6.4%/6.2% of loan assets as of June/Sept/Dec after including the write-offs. Though higher write-offs in Q3 FY24 (Rs4bn v/s Rs2.5bn in preceding 2Qs) underpinned higher-than-expected credit cost of 1%, the company is on path to deliver the 1% guided credit cost for the whole year.

Management commentary on growth remains strong

Chola doesn’t expect a significant slowdown in its growth over the coming quarters. Originations in New Businesses, particularly CSEL, has been restrained in recent quarters with corrections implemented in Fintech partnership channel (NPLs have substantially come down after the write-off in Q3 FY24). Management is confident of growing the vehicle finance portfolio at 20%+ yoy aided by strong focus on used CV/PV/Tractor financing and robust momentum in Car/UV, 2w and CE loans. LAP and Home Loans are expected to lead company’s growth in coming years aided by distribution expansion, sturdy profitability and encouraging asset quality trends. Availability and cost of funds is unlikely to be an issue for funding growth, and the co. has been diversifying its funding base (recently raised funds from IFC and through Retail NCD issue).

Expect 30% AUM/Earnings CAGR over FY23-26 with avg. RoE of 20%; Maintain ADD

We retain constructive stance on Chola expecting solid growth execution to continue, recovery in margins from hereon, and delinquencies in New Products being managed within tolerance/risk pricing levels. We expect co. to deliver 30% AUM and earnings CAGR over FY23-26 with avg. RoE of 20% even after the capital raise. With no material risk to higher growth and RoE delivery at this point, we maintain ADD rating with increased 12m PT of Rs1380 (multiple rolled over to FY26). Stock trades at 3.6x/18x PABV/PE on FY26 estimates.

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