Chola Finance - Multi product, high operating leverage - Anand Rathi

- The NBFC has diversified its product profile over the last two years. Tractor and used CVs now form 36% of the vehicle portfolio, compared to 29% two years back

- Core earnings to be strong, driven by its multi-product strategy and strong branch-network expansion. The branch network has recorded more than a 40% CAGR over FY10-13

- NIM likely to improve given the greater share of higheryielding assets such as tractors and used CVs. The NBFC also does not run any asset-liability mismatch

- Cost-to-assets has improved from 3.8% in FY11 to 3.3%, still higher than peers. The high operating leverage is likely to help drive improvement in RoAs to 2.3% by FY16

- While asset quality has deteriorated, GNPA at 1.7 % is lower than peers. We build in higher than past credit costs to factor in a weak macro-economic environment.

- At our price target of Rs. 325, the stock would trade at 1.6x FY15e and 1.4x FY16e BV. Our target is based on the twostage DDM (CoE: 16%; beta: 1.1; Rf: 8.5%). Risks: Slowdown in the rural economy could lead to lower-than-expected growth and more-than-expected NPA.

Source : Equity Bulls

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