Cholamandalam Investment: Stellar Q4; promising outlook
Cholamandalam Investment: Stellar Q4; promising outlook.
Highlights
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- Steady acceleration in loan growth across verticals
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- NIM likely to stabilise
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- Asset quality and return ratios improve
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- New segments to help sustain profitability
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- Valuation rich
Cholamandalam Investment and Finance Company’s (Chola; CMP: Rs 1,230; Market cap: Rs 103,000 crore; Over-weight) profit jumped 25 percent year on year (YoY) and crossed the Rs 1,000-crore mark in the March quarter (Q4FY24), led by lower credit cost.
The stock surged more than 10 percent, following a stellar performance, hitting a 52-week high on May 3, 2024.
AUM growth momentum to sustain
A broad-based rise in disbursements across segments led to a robust AUM (assets under management) growth of 37 percent YoY. The AUM reached Rs 1.46 lakh crore, as of March 2024.
The growth momentum continued in the core VF (vehicle finance) business which comprises the bulk of the loan book (58 percent), helped by the presence in new and used segments. Mortgage portfolio performance (loan against property/LAP and home loans/HL) outperformed other segments, led by geographic expansion and deeper penetration. HL will grow at a faster rate than the industry, led by strong credit demand, as per the management.
While the bulk of the contraction in the CV and tractor segment was due to the high base, the PV segment’s growth was attributed to higher replacement demand and new utility vehicle models. Sustained rural recovery will continue to drive demand for two wheelers.
Although, the VF segment could see some slowdown in the coming quarter, the momentum will improve on the back of better monsoon and improved macros. The management is confident of growing the segment by 20 percent in FY25.
New businesses — Consumer & Small Enterprise Loan, Secured Business & Personal Loan, (SBPL) and SME Loan — constituted 23 percent of the disbursement mix and will continue to see rapid growth in the coming fiscal.
For FY25, the AUM growth is guided in the 25-30 percent range, led by a disbursement growth between 20 percent and 25 percent.
Improved asset quality
Gross-non performing (GNPA – RBI) assets improved by 110 basis points (bps) YoY to 3.5 percent, while credit cost reduced by 40 bps YoY to 1 percent in FY24.
New business credit cost will be higher compared to other segments. Overall, credit costs are guided to in the range of 0.8-1.2 percent in FY25, backed by stable asset quality.
Margin to sustain
NIM (net interest margin) remains stable YoY in the quarter despite higher cost of funds.
The funding cost remained high and investment in new businesses and annual employee incentives led to a sharp growth in the cost-to-income ratio. The management expects the cost of borrowings to increase slightly due to the diversification in the source of funding.
The opex-to-AUM ratio is guided at around 3 percent, backed by an improved operating leverage in the new business and NIM will sustain at the 7.5 percent level, backed by higher yields, as per the management.
Outlook and valuation
The CV segment’s growth will remain flattish in the coming quarter due to the general election, while two wheelers, construction equipment, and tractors will grow at a moderate pace. Normal monsoon and growing penetration will drive rural demand and speed up growth recovery in the coming period. The focus will remain on the high-yield used-vehicle segment (26 percent of the loan book), as per the management.
In terms of mortgage portfolio, better credit quality and improved collection efficiency in the LAP and affordable HL segment will aid the overall improvement in asset quality. With a retail focus, Chola is leveraging its vast geographic presence to penetrate deeper into Tier 3 and 4 cities, which will drive growth and support margins.
A higher growth in the nascent segments will help sustain profitability, while contained credit cost will likely offset any NIM moderation and drive the ROA (return on asset).
ROA is guided to reach 3.7 percent in the long term
Positive outlook and growth potential for the near future make Chola a promising investment opportunity in the finance industry.
The stock is trading at a premium valuation of 3.6 times FY26 estimated book value and should be a long-term buy on account of the sector tailwinds and high return ratios.
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