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Maintain BUY on Cholamandalam Investment and Finance Company - HDFC Securities

Posted On: 2021-08-03 17:29:38 (Time Zone: UTC)

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

Chola's Q1FY22 earnings disappointed our forecasts on account of elevated provisioning (~3.4% of AUM, annualised). The aggregate stressed portfolio (GS-II + GS-III) doubled sequentially to 21% as the pandemic disrupted collections and recoveries. Disbursements remained muted (~55% down QoQ), leading to muted AUM growth of 7% YoY. A sharp spike in stress pool led to elevated provisioning, although the coverage ratio across buckets declined sequentially (PCR at 36%). With early trends in June and July reflecting a better collection environment, management has indicated FY22 provisioning to be near equal to that of FY21, implying medium-term reversal of impairments. We believe that the spike in impairment is transient, which does not disturb our medium-term thesis of Chola as a potential 18-20% RoE franchise. Maintain BUY with a target price of INR 613 (4.1x Mar'23 ABVPS).

Robust operating performance: Chola reported strong NII/PPOP growth of 35%/56% YoY, largely on the back of sustained yields, cost of funds tailwinds, and operating efficiency. NIMs were steady at 7.6% as tailwinds from funding costs continued to accrue (100bps/20bps decline YoY/QoQ). The cost-to-income ratio improved to 27% (Q1FY21: 35%) on the back of lower business momentum and incremental efforts at improving cost efficiency.

Sequential spike in stress; expect moderation by end-FY22: Chola reported GS-II/GS-III at 14%/6.8%, a steep sequential spike from 6.2%/4% respectively in Q4FY21. The GS-II portfolio included a restructured loan book at ~3.9% of AUM. CIFC has provided short-tenure moratorium to its customers opting for restructuring. With relatively lower presence in HCV segment and a large-fleet operators segment, the management expects recent trends in collections and recoveries (witnessed during Jun-Jul'21), to help normalise early-bucket delinquencies and credit costs during FY22. ~80% of customers in GS II+III buckets have been paying their current month dues to the company. The home equity segment GNPA increased to 8.9% (Q4FY21: 7.3%), while a further 3% of portfolio has been restructured. Our forecasts currently build in cumulative provisioning of ~2.4% during FY22-FY23E.

Weak disbursement run rate in a muted economic environment: Chola's disbursements dropped steeply by ~54% QoQ after having exhibited strong momentum during H2FY21. The decline in disbursements was seen across categories, as the bulk of the quarter was affected by localised lockdowns. We expect AUM growth to remain muted during FY22 and factor in growth of 13% CAGR during FY22-FY23E.

Shares of Cholamandalam Investment and Finance Company Ltd was last trading in BSE at Rs. 516.8 as compared to the previous close of Rs. 526.35. The total number of shares traded during the day was 124522 in over 3375 trades.

The stock hit an intraday high of Rs. 528 and intraday low of 512.15. The net turnover during the day was Rs. 64480480.

Source: Equity Bulls

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