Maintain BUY on Cholamandalam Investment & Finance - Firing all cylinders - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities

CIFC's 2QFY21 PPOP was significantly ahead of our estimates, aided by strong margin expansion and controlled operating expenditure growth. The management prudently chose to insulate the balance sheet by creating further COVID-19 related provisions, which is always welcome. Business traction improved as disbursals reached ~88% of 2QFY20 levels and YoY AUM growth accelerated slightly. Even as CIFC witnessed a sustained improvement in collection efficiency, which is heartening, we conservatively factor in a rise in GNPAs in FY21E. We have upgraded our earnings estimates on the back of strong operating performance, as we build in an improvement in margins and operating efficiency. CIFC remains our top pick amongst the NBFCs within our coverage due to its demonstrated superior performance on multiple business parameters. Maintain BUY with a revised target price of Rs 319.

Collection efficiency and asset quality trends: Reported GS-II dipped 12% QoQ (+6.3% YoY) to Rs 17.6bn (2.8%). Adjusted for the impact of the recent SC order, GS-III would have been ~3%. Until July, ~50% of customers had paid at least one instalment (including part of an instalment). This number improved to ~95% in October. Collection efficiency stood at ~87% (vs. the usual run rate of 100-105%). The management forecasted a reversion to pre- COVID-19 levels in the near term. In the worst case scenario, the management expects ~5% of the portfolio to be restructured but has identified only a fifth of this so far. Despite the sharp improvement in collection metrics, we expect a sharp rise in GNPAs to 4.8% by FY21E.

Non-tax provisions registered a sharp rise (~3.4x/5.7x, 1.94% ann.) and included ~Rs 2.5bn of COVID-19 related provisions, which takes the total stock of such provisions to ~Rs 8bn (1.2% of AUM). This indicates the management's conservative approach to provisioning, which is always desirable. We have, in fact, lowered our provision estimates (even as they remain elevated vs. prior years) given the significant improvement in collection efficiency and high coverage.

Funding and liquidity: CIFC remains one of the best-placed NBFCs on both these fronts. Borrowings grew 8.4/3.5%, slightly behind AUMs. Overseas borrowings, which grew ~22/33%, accounted for a significant portion of the net QoQ increase, followed by debentures, which grew ~14% QoQ. CIFC held cash and bank balances of ~Rs 68bn, together with undrawn lines, available liquidity was ~Rs 98bn (16.2% of borrowings). CIFC's comfort on these fronts, together with its superior asset quality and execution capabilities, will allow the company to capture resurgent growth.

Shares of Cholamandalam Investment and Finance Company Ltd was last trading in BSE at Rs.292.75 as compared to the previous close of Rs. 273.1. The total number of shares traded during the day was 390179 in over 7787 trades.

The stock hit an intraday high of Rs. 294.95 and intraday low of 268.65. The net turnover during the day was Rs. 111272341.

Source : Equity Bulls

Keywords