Cholamandalam Investment and Finance - Beefing-up buffer to cushion earnings; positioned to grow when normalcy returns - ICICI Securities

Cholamandalam Investment's (Chola) Q4FY21 earnings surprised on few counts: 1) Despite retracement in collection efficiency, stage-2/3 went up QoQ (crossing 10% mark); however restructuring of ~2% was categorised as stage-2 assets; 2) its stance of creating further covid buffer of Rs3.5bn (against its Q3FY21 guidance of consuming the buffer); and 3) elevated employee cost of Rs2.7bn (vs Rs1.6n quarterly run-rate). What helped offset this drag was sustained business momentum (14% AUM growth) and consistently declining funding cost. The way we read the earnings and the management's narrative - it is cautious of the second wave impact with visible (lower) disbursement/collection trends in Apr/May, but has created a cumulative provisioning of 3.6% to cushion earnings volatility. Strengthening its market positioning in tractors, cars, LCV, CE etc and investing in LAP segment can help lever opportunities when normalcy returns. Chola exiting FY21 pandemic with 7%-plus NIMs, <2.5% cost to assets, ~2% of credit cost and 17% RoE reinforces confidence on delivering 18-20% RoE profile over the medium term. This can help it command valuations at 3.75xFY23E book. We upgrade the stock to ADD (from Hold) with a revised target price of Rs617 (earlier: Rs465).

- Stress pool (stage-2/3) crosses 10%; includes restructuring pool as well: Stage-3 inched up QoQ from 3.75% to 3.96% primarily led by stage-3 vehicle financing at 3% (2.8% in Q3FY21), home equity at 7.25% (7.3%), and home loan at 3.2% (3.8%). Stage-2 pool too has risen from 5.24% to 6.2% - of the Rs42.5bn, vehicle financing constitutes Rs35bn (>7%). This compares with pre-covid average stage-3 at 3.0-3.5% and stage-2 at 3.5-4.0%. This suggests stress was elevated to the extent of 3-4% due to covid first wave pandemic. Management hinted it equally worries about the disruption in the second phase as it was in the first phase.

- Collection efficiency retraced in March, but dipped in April amidst disruption: Vehicle finance collection efficiency (CE) retraced from 103%/105%/108% in Oct/Nov/Dec, respectively to 116% in March (of Rs21.2bn of billing, it could collect Rs24.6bn). Cumulative CE (on collectible pool of Rs21.2bn of March billing and Rs18.8bn of other dues) thereby, settled at 62% (as it collected Rs24.6bn). Early bucket CE was 98.6% in March with roll-forwards being 1.4%. However, management indicated CE in April has been hampered due to the second wave - it collected Rs19.7bn on the same collectible pool implying 93% vehicle finance CE. Cumulative CE thereby, tends to be down to 50% and in early buckets roll-forwards have increased to 4.57% (95.4% CE). Also, the company is not actively resorting to repossession in current circumstances unless it is intentional or has business viability issues.

- Restructuring at ~2% and ECLGS disbursements at ~3% came in higher than envisaged earlier: Restructuring settled higher at Rs14.6bn of which Rs11.8bn is in MSME segment and Rs2.8bn towards retail loans. As a matter of prudence, restructured pool is classified in stage-2 assets. Disbursements under ECLGS scheme further rose to Rs20bn (2.9% of AUM) with disbursements equivalent to 2.4% in vehicle financing (Rs12bn) and 5.4% in LAP (Rs3.24bn). In vehicle financing, it is skewed towards HCVs attached to industrial segment and bus operators.

- Beefed-up contingency buffer rather than consuming it amidst uncertainty: Given the visible impact of disruption caused by the second wave on April and May collections and uncertainty going forward, it chose to beef up the buffer by Rs3.5bn. This is in contrast to its earlier stance of consuming the buffer in Q4FY21 and carrying forward only Rs2.5-3.0bn as reserves. In fact, cumulative covid buffer now stands at Rs11bn (1.6% of gross assets). This quarter's buffer was largely earmarked to stage-1 assets as coverage on this bucket increased QoQ from 0.67% to 0.88%; provisioning coverage on stage-2 and stage-3 was maintained at 17% and 44%, respectively. This implies that on stress pool (stage-2/3) of slightly more than 10%, it is carrying provisions to the extent of 3.6%. We anticipate asset quality to peak at 4.7% through FY22, though differentiated underwriting and strong collection focus will help Chola manage the cycle better. We also conservatively model credit cost of 1.8%/1.4% in FY22E/FY23E, respectively.

- Diversified product bouquet with improved positioning can help it lever opportunities when situation normalises: Vehicle finance disbursements for full year FY21 were down mere 13% driving 14% AUM growth - commendable amidst covid disruption. Q4FY21 witnessed momentum in LCV/HCV/CE, while used vehicles was down QoQ on a higher base. LAP disbursements were flat in FY21 over FY20 and LAP AUM too grew 14%. Home loan disbursements, too, were flat in FY21 but AUM on a low base grew 39%. It has gained market share in tractors, CEs while in CVs it has broadly remained stable. In LAP segment, it has hired manpower and added branches that is supporting disbursement growth in H2FY21. We are building in an AUM CAGR of 13-16% over FY21E-FY23E.

- Funding cost benefit supports NIMs: The groups standing, AA+ credit rating, well managed ALM and given 55% borrowing flowing from banks, the consistent reset in rates has helped steady decline in cost of funds QoQ. Finance cost was flat in FY21 despite 15% increase in total borrowings. As compared to this, relatively lower reset in yields further supported by securitised pool reset supported NIMs over 7%. We expect NIMs to moderate with stability in borrowing cost, competitive lending market and unwinding of securitised pool benefit.

- Elevated employee cost pushes opex growth higher: Elevated employee cost too led to earnings miss - it was up 68% YoY and 75% QoQ. Staff cost was higher as it added collection capacity and incentives kept on hold were released at the end of FY21 with improved performance. Management guided that headcount will further increase in coming quarters since the company is also entering newer products and geographies along with the collection team and so, employee cost will further go up in FY22 (over and above 14% growth in FY21). However, similar to this fiscal, it will be consistent with growth in AUM.

Shares of Cholamandalam Investment and Finance Company Ltd was last trading in BSE at Rs.550.55 as compared to the previous close of Rs. 553.9. The total number of shares traded during the day was 179971 in over 6068 trades.

The stock hit an intraday high of Rs. 554.55 and intraday low of 532.25. The net turnover during the day was Rs. 97725419.

Source : Equity Bulls

Keywords