Maintain BUY on Cholamandalam Investment & Finance Company Ltd - HDFC Securities

Mr. Darpin Shah, Head Institutional Research & Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities.

Cholamandalam Investment & Finance (Q4FY20): Well placed in the face of adversity. Maintain BUY
(TP Rs 225, CMP Rs 143, MCap Rs 117bn)

CIFC's operating performance was a tad below our estimates, while earnings were considerably lower as CIFC made significant proactive provisions (Rs 5.0bn, 83bps of AUMs). We've lowered our earnings to factor in (1) higher provisions, given that 76% of the book is under moratorium, and (2) slower growth. Nevertheless, CIFC remains our top NBFC pick, given (1) its strong liquidity and funding profile, (2) superior historical asset quality trends and (3) diversified portfolio. Maintain BUY with a TP of Rs 225 (2.0x FY22E ABV).

Funding and liquidity: At 8.8% YoY (flat QoQ), CIFC's borrowings grew in tandem with its AUMs. The shift from market borrowings to bank borrowings persisted, as bank loans (63% of borrowings) grew ~55.7/10.7% and o/s debentures (10%) and CPs (3%) dipped 48.2/16.6 and 53.4/57.1% resp. CIFC did not opt for the moratorium on its own borrowings and does not intend to do so. On the liquidity and funding fronts, CIFC is one of the best positioned NBFCs, given its strong capital (20.7%, +332/364bps, fortified by the recent fund raise) and liquidity positions (Rs 100bn of liquid assets and undrawn lines, and comfortable ALM position across buckets), and debt-raising track record (as seen post Sep-18).

Asset quality: In a departure from usual trends, GS-III increased QoQ (+6.9%/26bps) to Rs 21.63bn (3.8%)-possibly indicative of the impact of COVID-19. Interestingly, GS-II declined slightly, YoY. 76% of borrowers opted for the moratorium. The management was quite sanguine on CIFC's asset quality prospects and its comfort was premised on (1) increasing normalisation and roll-back rates (NRRB) amongst delinquent customers, and (2) decreasing roll forward rates amongst standard customers to whom moratorium had been granted. However, we conservatively continue to model for a material increase in stress owing to extrinsic factors and high moratorium %, and expect GNPAs of 5.0% by FY21E.

COVID-19 related management commentary: (1) 90% of branches have commenced operations. (2) 79% of VF loans by value and 66% of HE loans were under moratorium. (3) NRRB increased from Feb to May (11%-26% in the 1-2 bucket, 11%-31% in the 2-3 bucket and 20%-31% in the 3-4 bucket). (4) Roll forward rates dipped (from 6% in Feb-20 to 1% in May-20 in the 1-2 bucket and from 19%-3% in the 2-3 bucket), (5) CIFC does not intend to raise capital in the near term. (6) The management expects demand for 2w, cars, LCVs and used vehicles to fare better in the near term. (7) The entire HE portfolio (21.4% of AUM) and some part of the VF portfolio are eligible under the NCGTC scheme.

Shares of Cholamandalam Investment and Finance Company Ltd was last trading in BSE at Rs.142.65 as compared to the previous close of Rs. 155.75. The total number of shares traded during the day was 1117552 in over 18198 trades.

The stock hit an intraday high of Rs. 158.45 and intraday low of 141.65. The net turnover during the day was Rs. 164059628.

Source : Equity Bulls

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