Cholamandalam Investment and Finance - Valuations capture its improved market positioning and adequately covered stress - ICICI Securities

Cholamandalam Finance's (Chola) stress pool (including stage-2/3) is managed at a better level than vehicle financing peers at 9% - albeit up QoQ (by 330bps) as well as pre-Covid level (by 160bps). This has to be looked at in conjunction with 2% restructuring and 2.2% of assets (Rs15bn) disbursed under ECLGS schemes. Towards this, the company created credit cost of 250bps (annualised) in Q3FY21 to take total provisioning to 3.1% of AUM (1.13% management overlay buffer). Collection trends and texture of restructuring suggest stress can be managed with further credit cost of 1.8%/1.6%/1.4% in FY21/FY22/FY23. Used vehicles, LCV, tractors CE financing and LAP aided 23% QoQ/6% YoY growth in disbursements and 15% YoY AUM growth. While we remain confident of Chola being able to deliver superior collections in addition to cost, capital and growth efficiency and emerge stronger, valuations at 2.6xFY23E book captured fair bit of near-term fundamentals. We downgrade the stock to HOLD with a revised target price of Rs465 (earlier: Rs 337), valuing the stock at 2.75x FY23E P/BV.

- Stress pool (stage-2/3) rise to 9%; collection within buckets comforting: Pro forma stage-3 inched up QoQ from 2.98% to 3.75% and stage-2 pool too has risen to 5.24% primarily led by home equity (stage-3 pool at 7.3%), vehicle financing at 2.8% and home loan at 3.8%. Collection efficiency (against billing) as was guided, retraced from 87% in September to 103%/105%/108% in Oct/Nov/Dec, respectively. Collections within stage-1 and stage-2 buckets are on better-than-expected trajectory and it doesn't expect much flow-through into stress from these buckets.

- Restructuring and ECLGS disbursements higher than envisaged: Restructuring settled higher at 2% than the earlier indicated identified pool of <1%. However, restructuring is a mere extension by 60-180 days and given the cautious stance in extending easy restructuring will not flow into incremental stress. Disbursements under ECLGS scheme were elevated compared to peers at Rs15bn (2.2% of AUM) with 18% vehicle finance (Rs11.72bn) and 27% LAP (Rs3.24bn) being eligible. This is skewed towards new HCVs attached to industrial segment and bus operators.

- Credit cost at 250bps; cumulative provisioning pool at 3%: Despite incremental flow into stage-2/3 assets, provisions came in lower than expected at Rs4.4bn in Q3FY21 (credit cost 2.5%), especially in vehicle finance business. With this, it now carried cumulative provisioning of 3.09% (against pre-Covid average of 1.8%), suggesting 1.13% additional provisioning. Management overlay provisions amounting to Rs2.5-3.0bn will be held as reserve, while the rest will either be consumed or reversed in upcoming quarters. We anticipate asset quality to peak at 4.8% through FY22, though differentiated underwriting and strong collection focus will help Chola manage the cycle better. We also conservatively model credit cost of 1.8%/1.6%/1.4% in FY21E/FY22E/FY23E respectively.

- Consolidating market leadership in used vehicle, tractor, LCV financing: Used vehicles, LCV, tractors CE financing and LAP aided sustain 23% QoQ/6% YoY growth in disbursements and 15% YoY AUM growth. 1) In tractor financing it has further improved its market share to 5.4%; 2) uptick in LCV demand in rural areas helps it garner increased market share; 3) it is closely monitoring HCV segment for further improvement in market conditions and fleet owner sentiments; 4) with revival of MSME business activities pan-India, LAP disbursements are expected to increase in Q4; it primarily focuses on retail ticket size that too in tier 2/3/4 cities; and 5) home loan portfolio is moderating due to balance transfer out pressure amidst competition intensity. We are building-in an AUM growth of 16-19% over FY21E-FY23E.

- NIMs surprise positively and settle higher: Drawing support from mix change (in favour of high-yield portfolios), spread revision in securitisation portfolio and ~40bps benefit of lower borrowing costs, led to further 70bps QoQ expansion in NIMs to 8%. Consequently, net interest income grew 26% YoY and settled higher than expectations. We expect NIMs to moderate with recognition of stress and unwinding of securitised pool benefit, and are building-in NIMs of 7.3-7.5% over FY22E/FY23E.

Shares of Cholamandalam Investment and Finance Company Ltd was last trading in BSE at Rs.439.15 as compared to the previous close of Rs. 443.5. The total number of shares traded during the day was 494792 in over 9892 trades.

The stock hit an intraday high of Rs. 475 and intraday low of 434.1. The net turnover during the day was Rs. 225881881.

Source : Equity Bulls

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