Robust growth intact with improving NPA recoveries

Target Price: Rs1,703
CMP: Rs1429
Upside: 19.0%

Cholamandalam Investment & Finance Co Ltd (CIFCL), for Q1FY19, reported good set of numbers with net profit growing 36.0% YoY while asset quality weakened marginally – gross NPAs up 9bps QoQ to 2.99% as on 30 Jun’18, on moving to IndAS. The AUM grew 30% YoY to Rs46,663 crore as on 30 Jun’18. This was backed by overall disbursement growth of 45% to Rs7,015 crore (48% growth in vehicle financing – VF, 27% in home equity – HE and 40% in other disbursements).

Recommendation: We have been maintaining Outperformer rating on the stock of CIFCL (Q4FY18 on 30 Apr’18 @ Rs1,738) on the back of robust growth and improving asset quality. Since then, the stock is down by ~18% largely driven by overall market correction and is trading at 2.9x its FY20E ABV. In Jul’18, the MD & CEO Mr N Srinivasan expressed his desire to step down (resignation effective from 18 Aug’18), a year before the end of his tenure due to personal reasons. As he has played an important part in building the strong business ecosystem of CIFCL, it would be important to watch for the practices adopted by the new leadership. Also, on retirement of Chairman Mr. M.B.N. Rao, the new Chairman of CIFCL Mr. M.M. Murugappan has assumed office. We retain our Outperformer rating on the stock from a long term perspective with a target price of Rs1,703, valuing the stock at 3.5x its FY20E ABV.

Loan growth improves: As on 30 Jun’18, loan book stood at Rs45,097 crore, a growth of 29.6% YoY, led by disbursement growth of 44.6% during Q1. The AUM under VF segment grew at a robust pace of 37.6% YoY to Rs33,354 crore on the back of demand recovery in the automobile sector (esp. CVs) and that for HE segment grew 7.6%. Disbursements in VF grew 48% on the back of strong growth across product lines HCV, LCV and mini LCV. Going ahead, on the back of increasing disbursements, market share and improvement in state economies, we expect the loan growth to witness 22% CAGR to Rs55,805 crore, over FY18-20E.

NPAs to remain low: Asset quality weakened marginally with gross and net NPAs increasing 5bps QoQ each to 2.99% and 1.71%, respectively. The provisioning and net NPA for Q1 were as per Ind AS requirements, as the company moved to new accounting standards in the quarter. The provision coverage ratio stood at 42.7%. On the segmental front, gross NPAs in VF stood at 2.18% as on 30 Jun’18, up 14bps QoQ. However, gross NPA in HE segment declined by 21bps QoQ to 5.15%, thus giving hope on future recoveries. CIFCL has, so far, acquired ~45 properties under SARFAESI and is liquidating them gradually, thus resulting in decline in absolute value of HE gross NPAs. With recoveries on track, we expect the gross and net NPAs to decline to 1.60% and 0.86% by the end of FY20E.

Risk factors: 1) Slower than expected business recovery; 2) Delay in NPA recovery;

Shares of Cholamandalam Investment and Finance Company Ltd was last trading in BSE at Rs.1448.1 as compared to the previous close of Rs. 1443.5. The total number of shares traded during the day was 8675 in over 520 trades.

The stock hit an intraday high of Rs. 1452.2 and intraday low of 1435.05. The net turnover during the day was Rs. 12554979.

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