Buy Cholamandalam Inv & Fin Ltd for the Target Rs.2,160 by Motilal Oswal Financial Services Ltd
Scaling beyond the core: Unlocking a broader growth opportunity
* Diversification is extending the growth runway: Cholamandalam’s (CIFC) core vehicle-finance franchise continues to provide scale, but the next phase of growth is increasingly being supported by mortgage, consumer finance, MSME and gold loans. We expect CIFC to sustain ~20%+ AUM growth over the medium term even as vehicle finance’s share of the portfolio declines. The gradual shift toward a broader product mix should reduce its dependence on any single segment and make growth more resilient across cycles.
* Mortgage provides the quality anchor; new businesses add growth and yield: Mortgage is emerging as the key growth engine beyond vehicle finance, aided by higher-ticket home loans, deeper rural penetration and expansion in LAP. At the same time, gold and consumer finance offer higher-yielding opportunities, while MSME strengthens the SME franchise. The combination of secured growth, higher-yielding businesses and a broader customer franchise should improve the quality and diversity of earnings over time.
* Earnings growth does not depend on aggressive margin expansion: We expect NIM to remain broadly resilient at 7.3%/7.1% in FY27E/FY28E, despite a likely 10–20bp increase in funding costs in 2HFY27. A favorable funding mix and rising contribution from higher-yielding businesses should ease pressure on spreads. With credit costs normalizing and operating leverage improving, we expect RoA to rise from 2.3% in FY26 to 2.7% in FY27E/FY28E.
* Strong growth and improving returns support the premium valuation: CIFC is increasingly transitioning from being a vehicle financier into a diversified lending platform while retaining the distribution and execution strengths of its core franchise. We expect AUM/PAT CAGR of ~21%/~27% over FY26–28E, with RoE remaining around 20%. While CIFC trades at a premium to its vehiclefinancing peers, we believe the premium is supported by its superior growth trajectory, improving RoA and increasing business diversification. We reiterate BUY with a TP of INR2,160, based on ~4x Mar’28E BVPS.
Multiple engines, one integrated franchise
CIFC’s key advantage is its ability to leverage its branch network, customer relationships and underwriting capabilities across multiple lending businesses. Vehicle finance remains the scale anchor, while mortgage provides a large, secured growth opportunity. Gold and consumer finance can improve portfolio yields, and MSME provides another avenue for customer acquisition and diversification. As these businesses mature, greater customer engagement and cross-selling should create additional monetization opportunities.
Portfolio mix to cushion rising funding costs
CIFC’s funding profile remains supportive, with continued reliance in bank funding, including priority-sector lending, alongside greater visibility from fixed-rate bond borrowings. We expect funding costs to increase by ~10–20bp in 2HFY27 after remaining broadly stable in 1HFY27. However, the impact should be partly offset by the rising contribution of higher-yielding businesses such as gold loans and consumer finance. We, therefore, model NIM at 7.3%/7.1% in FY27E/FY28E, indicating that earnings growth can remain strong without assuming a consistent margin expansion.
Asset quality remains manageable; new businesses warrant monitoring
CIFC’s collection infrastructure remains a key strength, with ~30,000 collection personnel, product-specific recovery strategies and increasing use of digital collections, which now account for ~50% of total collections. Investments in AI-led underwriting and revamped credit models across vehicle finance and mortgages should further strengthen risk selection. While 1QFY27 asset-quality metrics saw some seasonal pressure, we believe the overall portfolio remains manageable. Importantly, the ~INR2b management overlay and FY27 credit-cost guidance of ~1.5% provide a cushion as new businesses continue to season
Valuation and view
* CIFC is entering a phase where balance-sheet diversification, rather than merely balance-sheet expansion, should drive earnings growth. Its established franchise provides a strong foundation for scaling up the adjacent businesses without requiring a fundamental change in its operating model. We expect the combination of ~20%+ growth, resilient NIMs, improving operating leverage and normalized credit costs to drive a meaningful improvement in profitability.
* At ~4.1x FY27E P/BV, CIFC trades at a premium to its vehicle-financing peers. We believe this premium is justified by its stronger growth trajectory and superior return profile, with RoA/RoE expected at 2.7%/20% by FY28E. We forecast ~27% PAT CAGR over FY26–28E and reiterate BUY with a TP of INR2,160, based on ~4x Mar’28E BVPS.
* Key risks:
a) Rural cash-flow stress: Below-normal rainfall or weaker agricultural income could increase delinquencies across vehicle finance, MSME and affordable housing.
b) New-business seasoning: New portfolios are yet to fully season; higher-than-expected delinquencies in SME/SBPL and other emerging businesses could delay credit-cost normalization. c) Funding-cost pressure: A steeper-than-expected increase in borrowing costs could put pressure on spreads and delay the expected improvement in RoA.
d) Crossselling economics: Any regulatory changes affecting insurance commissions could impact the economics of insurance cross-selling
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH00000041
