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Maintain BUY on Cholamandalam Investment & Finance - A mostly good show - HDFC Securities

Posted On: 2020-08-04 09:38:47

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.

CIFC's 1QFY21 performance was ahead of our estimates on account of lower provisions. The management believes that COVID-19 related provisions made in 4QFY20 are sufficient. While we have reduced our provision estimates, they remain conservative. CIFC's 1QFY21 disbursal performance is creditable, given the challenging environment. The company remains our top NBFC pick, its ability to access funds, strong capital position, and diversified portfolio will enable the company to capture resurgent growth. Maintain BUY with a target price of Rs 249 (2.2xFY22E ABV).

Funding and liquidity trends: CIFC reported a 6.2/6.4% YoY/QoQ growth in borrowings to Rs 585bn. After declining significantly over the past two quarters, CPs outstanding saw a sharp QoQ growth (~2.5x) but were 25.7% lower YoY. Bank borrowings grew 43.2% - the fastest-growing borrowing sub-segment (YoY). Even though cash and cash equivalents rose 37.7/15.7% to Rs 80bn (available liquidity was ~Rs 110bn, including undrawn lines), the ALM position seems to have worsened QoQ, with shrinkage in cumulative quarterly surpluses across buckets. This may be on account of changes in anticipated inflows from advances. However, we do not find this worrisome as the company has been consistently well-placed on this front.

Moratorium and asset quality trends: The 7.7% QoQ fall in GS-III to ~Rs 20bn (3.3%) appears promising. However, this would have been assisted by the standstill classification. Further, ~74% of the portfolio remains under moratorium and ~50% of borrowers under moratorium paid at least one instalment. As sporadic local lockdowns occur across the country, flows from the moratorium portfolio will be watched.

Provisions: After the spike in 4QFY20, surprisingly, non-tax provisions registered a 48.7/89.9% fall to Rs 562mn. The management felt that it had adequately provided for COVID-19 related stress (in 4QFY20) and that coverage on GS-III (41.6%, -510/+12bps), more than adequately captured expected LGDs. However, given, that ~50% of the moratorium borrowers have not paid a single instalment, and sporadic lockdowns across the country, we have conservatively factored in non-tax provisions of 1.4% of average assets over FY21-22E.

Margin trends: NIMs dipped 40/50bps to 6.1%, as the fall in yields (-80/-90bps) outpaced the fall in CoF (-40/30bps). CIFC maintained a higher proportion of liquid assets in the quarter, and these assets saw a significant decline in yields. This, along with certain write-offs in the VF portfolio was responsible for the dip in overall yields. We expect CIFC to earn NIMs of 6.4% over FY21-22E.

Shares of Cholamandalam Investment and Finance Company Ltd was last trading in BSE at Rs.200.65 as compared to the previous close of Rs. 201.25. The total number of shares traded during the day was 373278 in over 5473 trades.

The stock hit an intraday high of Rs. 205.5 and intraday low of 198.5. The net turnover during the day was Rs. 75488212.

Source: Equity Bulls

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