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Visibility of strong earnings growth

Surpasses expectations yet again; Stage 2 & 3 increase largely seasonal

Chola delivered 10% earnings beat on our expectation, despite a higher credit cost, on the back of 1) stronger-than-expected disbursements/AUM growth, 2) 4% core NII beat with NIM expansion (calc.), 3) higher-than-expected fee/insurance income and 4) lower-than-estimated opex. RoA/RoE stood at 2.4%/19%.

Disbursements were 6% higher than expectations at Rs243.3bn (down 2% qoq/up 22% yoy), driving robust AUM growth of 7% qoq/35% yoy. Originations were better than our estimate in Vehicle Finance (VF) segment and the annual growth improved to 13% yoy from 6% yoy in the preceding quarter. Robust business traction continued in LAP with disbursements growing 45% yoy. Sequentially, HL and CSEL disbursements were higher by 2% and 6% respectively. NII (excl. Fees) grew by 9% qoq/40% yoy underpinned by improvement in portfolio yield (calc.) and stable funding cost (calc.). Notwithstanding disbursements being higher than our estimate, the opex was lower and the productivity/efficiencies mainly came through in New Businesses.

There was a significant 21-22% increase in both Stage-2 assets and Stage-3 assets (after adding back write-offs of Rs3.2bn). Uptick in Stage-3 level was mainly seen in VF and CSEL businesses. Due to material movement in asset quality, the credit cost was 1.5%. ECL coverage across stages was maintained.

Confident of sustaining growth and improving margins and opex level

Chola is confident of delivering 25-30% pa growth for the next three years with 1) diversified VF portfolio and strong positioning in used VF market, 2) continuance of robust growth in LAP (distribution/resource expansion and increasing share of microLAP), 3) sustaining traction in Home Loans (entry in new Tier 3 & 4 markets), 4) growing CSEL portfolio in-line with overall AUM with sourcing & underwriting adjustments behind and supportive asset quality, and 5) scaling-up SME financing and SBPL businesses. The contribution of VF is expected to decline, share of LAP & HL is expected to rise and that of CSEL is expected to stabilize around current level.

Management expects that NIM would improve over coming quarters with stabilization of CoF and improvement in Portfolio Yield. In VF business, the marginal yield is 40-50 bps better than the book yield. In longer term, fixed-rate nature of VF portfolio, product level composition change in AUM and moderation in funding cost should improve NIM. With opex/productivity benefits starting to manifest in New Businesses and scope for improving distribution/resource productivity in HL and LAP, the opex/asset ratio at the company-level is expected to come-off. Management’s aspiration is to reach 4% PBT RoTA within five years.

Visibility of high Growth/RoE and resilient asset quality justifies premium valuation

We retain constructive stance on Chola expecting solid growth execution, recovery in margins, manifestation of opex productivity and continuance of resilient asset quality. We estimate 27.5% AUM CAGR and 33% PAT CAGR over FY24-26 with average RoA/RoE delivery of 2.7%/21%. In context of industry-best Growth and RoE delivery, the current valuation of 20x PE and 4x P/ABV on FY26 seems justifiable. Maintain ADD rating and raise 12m PT to Rs1670.

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