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Stronger on Growth and NIM

An overall strong performance

Chola delivered a 5-6% beat on NII/POP on the back of stronger-than-expected disbursement/AUM growth. Overall asset quality was stable even with the expected increase in Stage-3 of New Products. Credit cost was higher than estimate and represented ECL coverage improvement in VF and increased delinquencies in New Products (CSEL, SBPL & SME loans). RoA/RoE for the quarter stood at 2.4%/20%.

Sequential Disbursements/AUM growth was robust across products at 4%/6% in VF, 19%/8% in LAP, 8%/13% in HL and 10%/18% in New Products with co. adding significant branches/distribution points in the quarter. Versus expectation of remaining flat, the NIM improved by 10 bps qoq with CoF stable and Portfolio Yield inching-up by 10 bps (stronger growth in used vehicle financing and AUM shift away from VF). Margin improvement came through despite substantial increase in BS liquidity. Opex/Asset ratio jumped sequentially across businesses (30 bps in VF, 40 bps in LAP and 10 bps in HL) reflecting higher business activity, distribution/manpower addition and increments & promotions. In absolute terms, Stage-2 loans were flat on sequential basis and there was an increase of 5% in Stage-3 assets. Stage-3 level improved in LAP and HL, was stable in VF and materially rose in New Products.

Management remains sanguine on growth, margin, and asset quality

The rise in delinquencies in New Products (essentially CSEL) over the past couple of quarters has been mainly witnessed in the Fintech partnership channel which comprised ~25% of this portfolio. The delinquencies in the traditional distribution channel are substantially lower. The co. has taken corrective actions in the Fintech channel like evaluation of partners and slowing the growth. Overall credit cost guidance has been maintained at 1.1% for the year.

NIM is expected to gradually firm-up in the coming quarters with CoF having largely peaked, disbursement yield running higher than portfolio yield (due to rate hikes taken in past 12m) and conducive portfolio mix changes. A diversified portfolio in VF, scalingup of small-ticket LAP and addition of distribution outside Southern markets in Affordable HL would continue to drive robust AUM growth for Chola in the medium term.

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% despite the recent capital raise. With no significant risk to higher growth and RoE delivery at this point, we maintain ADD rating with 12m PT of Rs1270. Stock trades at 4.2x/21x PABV/PE on FY25 estimates.

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