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AUM growth robust; No NIM expansion because of rise in CoB

Asset quality improved in newer business, supported by write-offs

* CIFC’s 3QFY24 PAT grew 28% YoY to INR8.8b (in line), while NII grew 36% YoY to ~INR21.7b (in line). 9MFY24 PAT rose 30% YoY to INR23.6b.

* ‘Other income’ rose ~75% YoY to ~INR4.1b. This was primarily because CIFC had started booking the insurance distribution income in the standalone entity after receiving the insurance agency license. ? Opex rose 41% YoY to ~INR10.6b (7% above estimates). CIR rose to ~41% (PQ: ~40%). PPoP grew ~40% YoY to INR15.2b.

* Overall GS3 declined ~15bp QoQ to 2.8%; NS3 was stable at ~1.6%, while S3 PCR declined ~220bp QoQ to ~45%. Annualized credit costs declined to ~1.1% (PQ: ~1.3%). GS3 in newer businesses improved ~35bp QoQ to 1.1% and PCR declined to ~45% (PQ: 63%) because of write-offs.

* New businesses contributed ~22% of disbursements in 3QFY24. CIFC has tightened the underwriting standards to control delinquencies in this segment. Higher yields in these segments (CSEL and SBPL) will be RoA accretive from FY25 onwards.

* NIM (calc.) remained stable QoQ, but core spreads (calc.) declined ~15bp to 6.4%, due to an increase in the borrowing costs (calc.) by ~30bp. The management shared that it does not expect any significant rise in CoB from its current levels. We model NIM of ~6.8% in FY24 and expect it improve to 7.0%/7.1% in FY25/FY26.

* We estimate a CAGR of 24%/27%/31% in disbursement/AUM/PAT over FY23- FY26. CIFC has levers on cost ratios and business AUM growth to deliver healthy RoA/RoE of ~2.8%/22% in FY26. We believe in CIFC’s ability to sustain profitable growth in this franchise. We reiterate our BUY rating on the stock with a revised TP of INR1,470 (based on 4.0x FY26E BVPS).

* Key risks to our target price are 1) higher delinquencies and credit costs in new businesses, particularly CSEL; and 2) pronounced cyclicality in the vehicle finance business, despite management making efforts to mitigate this cyclicality.

Key highlights from the management commentary

* In Vehicle Finance, the marginal book yield is 100bp higher than portfolio yields and the management expects NIM improvement to sustain in the near term.

* Guided for RoTA (PBT) of 3.5%, but the endeavor will be to improve the RoA from next year onwards.

Valuation and view

* CIFC is a franchise equipped to deliver strong AUM growth with benign credit costs (relative to peers), translating into sustainable RoE of ~21-22% across economic cycles. 30 January 2024 3QFY24 Results Update | Sector: Financials Cholamandalam Inv. & Finance 30 January 2024 13

* The stock trades at 3.3x FY26E P/BV. We believe that these premium valuation multiples will sustain as investors continue to have confidence in the company’s execution capability in new product lines and that its ability to successfully tide over the sectoral stress in personal loans. We reiterate our BUY rating.

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