Cholamandalam Investment and Finance - Rebuilds contingency buffer to cushion earnings volatility; growth signs visible - ICICI Securities

Cholamandalam Finance's (Chola) Q2FY21 PAT of Rs4.3bn (flat QoQ, up >40 YoY) beat our estimate of Rs3.2bn, primarily buoyed by 23% growth in net interest income (I-Sec: 3-5%). After exuding confidence on adequacy of provisioning in Q1FY21, the company opted to rebuild the buffer resulting in an elevated credit cost of 1.9%. Pro-forma stage-3 at 2.98%, 95% morat customer collection efficiency and cumulative contingency provisions of 1.25% over 1.4% specific provision coverage, suggest sufficiency of the buffer for now. Gaining market share, vehicle financing disbursements witnessed better than expected traction - up 48% QoQ (down 18% YoY) led by used vehicles, CE, LCV, 2W and tractor segments. We remain confident of Chola being able to deliver superior collections in addition to cost, capital and growth efficiency and emerge stronger. Consequently, we revise our earnings estimate upwards by 21%/5% for FY21E/FY22E. Maintain BUY with a revised target price of Rs337 (earlier: Rs313), valuing the stock at 2.5x FY22E P/BV.

- Sharp collection focus contains overdues at <5% (from 50%): Focus on field collection efforts has aided considerable improvement in collection efficiency in three months - 94% of morat customers have honoured more than one EMI obligation in October (50% in July) and two-thirds have met two or more EMI obligations. Overall, collection efficiency (including past arrears) is expected to retrace to 105% (from 87% in September). Flow of stage-1 overdues of 5.1% and stage-2 assets of 2.9% into stress and restructuring will be key monitorables. Company is cautious about extending easy restructuring and has identified a stress pool of <1% for restructuring as of now (even in the worst case, it will capped at sub-5%).

- After a pause, contingency buffer rebuilt as a caution: After exuding confidence on adequacy of provisioning in Q1FY21, Chola opted to rebuild the buffer; it created Rs2.5bn towards Covid-related contingency taking cumulative provisions to Rs8bn (1.3% of the book). This, coupled with specific provisions of 1.4%, takes the overall provisioning to 2.6% of advances. Credit cost was elevated at 1.9% in Q2FY21, despite pro-forma stage-3 reducing to 2.98% (3.34% in Q1FY21). We anticipate asset quality to deteriorate to 4.3% by FY21-end, though differentiated underwriting and strong collection focus will help Chola manage the cycle better. We also conservatively model credit costs of 163bps/127bps in FY21E/FY22E.

- Vehicle financing disbursements on a positive trajectory: Gaining market share in adversity, vehicle finance disbursements were up 48% QoQ led by used vehicles, CE, LCV, 2Ws and tractors. However, it tread cautiously in LAP and home loans, and disbursements were modest YoY/QoQ. Though BAU is still some time away, the momentum already gained gives enough reason to be cautiously optimistic for H2FY21. We are building-in an AUM growth of 16%/11% for FY21E/FY22E.

- NIMs surprise positively and settle higher: Drawing support from mix change (in favour of high-yield portfolios), spread revision in securtisation portfolio due to fall in purchasing banks' MCLR and lastly benefit of lower borrowing costs, led to 60/120bps YoY/QoQ expansion in NIMs to 7.3%. Consequently, net interest income grew 23% YoY and settled much higher than expectations. We expect NIMs to moderate with recognition of stress and unwinding of the securtised pool benefit, and are building-in NIMs of 7.0%/6.8% over FY21E/FY22E.

Shares of Cholamandalam Investment and Finance Company Ltd was last trading in BSE at Rs.273.1 as compared to the previous close of Rs. 250.1. The total number of shares traded during the day was 1194918 in over 30472 trades.

The stock hit an intraday high of Rs. 280.3 and intraday low of 248.6. The net turnover during the day was Rs. 321997153.

Source : Equity Bulls

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