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Inline quarter; Robust outlook

Cholamandalam Investment and Finance (CIFC) reported an in-line PAT of INR 9.4bn (+30% YoY, -11% QoQ) as NII grew (+40% YoY, +9.3% QoQ, +4% JMFe) to INR 25.7bn. However, NIMs were down -20bps QoQ as yields declined -10bps QoQ while CoFs moved up +10bps QoQ. Opex was down (-8% QoQ) on account of salary increments given in Q4. This led to PPoP of INR 18.5bn (+38% YoY, +14% QoQ). Credit costs were elevated at INR 5.8bn (155bps of AUM vs 135bps QoQ) due to usually weaker collections in Q1. AUM growth continued to remain robust at INR 1,554bn (+35%YoY, +6.8%QoQ) which was driven by healthy disbursements growth (+22% YoY, -1.8% QoQ) largely coming in from new businesses (SME, CSEL and SBPL), three wheeler and MUV. GS3/NS3 moved up +14bps/+11bps QoQ to 2.62%/1.49%. PCR declined -95bps QoQ at 45.5%. Mgmt guided for opex to decline in new businesses as it scales up while credit costs are likely to normalize in 2H on the back of healthy collections due to good monsoon. We believe that the new businesses (SME, CSEL and SBPL) and expansion of LAP and HL into rural areas will continue to aid strong growth momentum going forward and margins would start improving as VF book is gradually re-priced and mix shift continues toward high-yielding segments. The 5- year trajectory as indicated by management: i) 25-30% AUM growth ii) margins expansion led by high-yield product expansion and rural expansion followed by rate cuts, iii) improving operational efficiencies, and iv) steady credit cost target of ~1-1.2%; was the key positive that instilled confidence on achieving strong RoA-PBT of 4% over next 5 years. Given the strong execution track record, we believe this will contribute to sustained strong performance going forward. We revise our earnings estimates upward for FY25E/FY26E by +4%/+7% and continue to value CIFC at 22x FY26E EPS entailing a TP of INR 1,650. Maintain BUY.

* Stellar growth: CIFC witnessed robust AUM growth (INR 1,554bn, +35% YoY, +6.8% QoQ) on the back of healthy overall disbursements (+22% YoY, -1.8% QoQ) led by strong growth across the segments with continued momentum in new business growth viz. SME+SBPL+CSEL (+77% YoY, +13% QoQ), home loans (+53% YoY, +8.7% QoQ), LAP (+41% YoY, +7.6% QoQ) and vehicle finance (+25% YoY, +4.9% QoQ). CIFC continues to diversify its loan book across segments (VF-57%, LAP-21%, HL-9% and new business-13% as of 1Q25). Management plans to further increase its exposure in HL and LAP up to 35% of total book by expanding more branches in rural regions and VF book to gradually taper down to c.50% of total book due to higher growth from other segments. New businesses to be restricted to 15% out of which CSEL would be capped at 8% of total book. We believe that the new business aided cross-selling, strong traction in housing/LAP/SME and increased momentum in vehicle demand would sustain strong AUM growth. We build-in AUM CAGR of 28% over FY24-26E.

* Steady operating performance: CIFC reported strong NII of INR 25.7bn (+40%YoY, +9.3% QoQ, +4% JMFe), however NIMs were down -20bps QoQ due to strong AUM growth. Yields declined -10bps QoQ while CoFs moved up +10bps QoQ. Mgmt. expects the NIMs to gradually inch-up going ahead led by changing mix towards high-yield new business loans. Opex was down (-8% QoQ) on account of salary increments given in Q4. This led to PPoP of INR 18.5bn (+38% YoY, +14% QoQ). Credit costs were elevated at INR 5.8bn (155bps of AUM vs 135bps QoQ) due to usually weaker collections in Q1. This led to an in-line PAT of INR 9.4bn (+30% YoY, -11% QoQ). Mgmt guided for opex to decline in new businesses as it scales up while credit costs are likely to normalize in 2H on the back of healthy collections due to good monsoon. We build in NIMs expansion of +c.30bps over FY24-26E and improvement in opex ratio to 2.8% in FY26E (from 3% in FY24) which should aid in RoA-PBT of 3.6% in FY26E (vs 3.4% in FY24).

* Seasonally weaker asset quality: Asset quality slightly deteriorated during the quarter with GS3 at 2.62% (+14bps QoQ) and NS3 at 1.45% (+11bps QoQ) on account of seasonally weaker collections during Q1. Mgmt guided for asset quality to normalize in 2H as monsoon is expected to be healthy which should aid healthy collections. GS3 for VF (+25bps QoQ), LAP (-8bps QoQ), HL (+9bps QoQ), SME (+36bps QoQ), CSEL (+8bps QoQ) and SBPL (+18bps QoQ). Overall stress pool (stage2+stage3) was up +44bps QoQ at 5.11%. PCR on stage 3 was down -95bps QoQ at 45.5%. We build in avg credit cost of 1.2% over FY25-26E as guided by mgmt.

* Valuation and view: We believe that the new businesses (SME, CSEL and SBPL) and expansion of LAP and HL into rural areas will continue to aid strong growth momentum going forward and margins would start improving as VF book is gradually re-priced and mix shift continues toward high-yielding segments. The 5-year trajectory as indicated by management: i) 25-30% AUM growth ii) margins expansion led by high-yield product expansion and rural expansion followed by rate cuts, iii) improving operational efficiencies, and iv) steady credit cost target of ~1-1.2%; was the key positive that instilled confidence on achieving strong RoA-PBT of 4% over next 5 years. Given the strong execution track record, we believe this will contribute to sustained strong performance going forward. We revise our earnings estimates upward for FY25E/FY26E by +4%/+7% and continue to value CIFC at 22x FY26E EPS entailing a TP of INR 1,650. Maintain BUY.

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