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Cholamandalam Investment and Finance Q1FY15 results update

August 5, 2014, Tuesday, 13:07 GMT | 08:07 EST | 16:37 IST | 19:07 SGT
Contributed by Nirmal Bang

Cholamandalam Investment and Finance (CIFC) reported results marginally below estimates. Provisions continued to remain on the higher side and PAT stood flat both QoQ and YoY and stood at Rs 93 cr in Q1FY15.

- AUM growth moderated to 18.5% YoY and 2.9% QoQ led by slowdown in growth witnessed in both vehicle finance and home equity business. Vehicle finance growth moderated to 14% YoY while home equity business grew 32% YoY. On a lower base, new business loans increased 74% on YoY basis.

- Disbursement declined 2.8% YoY and 13.2% QoQ reflecting cautious stance of the management as it did not witnessed any pick up in collection efficiency. Decline was more prominent in the vehicle finance category while slowdown was witnessed in home equity as well.

- Within the vehicle finance segment, CIFC continues to focus on tractors (12% of total disbursement) and used vehicles (15%) while the share of HCV (8% of total disbursement) and LCV (23%) is declining.

- Management has guided for traction in the home equity segment and at the same time also added that some of the SME are taking cautious stance and hence the growth pace in the segment will witness moderation from earlier levels. Vehicle financing segment is expected to remain subdued. We expect loan growth to remain at ~20% for FY15-16E.

- Margins declined on YoY basis led by decline in yield on assets. Higher interest reversals also impacted margins. Going forward, margins are expected to remain broadly stable at current levels aided by change in product mix (high-yielding tractors and used CV finance).

- Gross NPA continued to increase on account of higher delinquencies in the vehicle finance portfolio. Portfolio quality in the home-equity segment remained relatively stable. We have increased our credit cost assumption to factor in the stress in CV finance.

- Cholamandalam has proposed to issue convertible preference shares of Rs 500 cr at Rs 407 per share to Apax Funds. The investor will earn dividend of 1% on these preference shares and within one year, these shares would be converted to equity. This infusion will improve tier-1 CAR, thereby supporting long-term growth of the company. Post this, management does not expect to raise capital for the next 3 years and is targeting asset book growth of 20-25%.

Continued weakness in the CV industry has impacted the growth momentum of the company. Management still believes it will take another 1-2 quarters for the pain in the sector to bottom out. Focus on cost control and improving productivity will lead to an improvement in cost to income ratio. We expect PAT to witness CAGR of 25.5% over FY14-FY16E. We expect RoE to be at 18.2% in FY16E and RoA (PAT) to be at 210% in FY16E. At CMP the stock is trading at 2.29x FY15E and 1.79x FY16E ABV and 13.79x FY15E and 10.86x FY16E EPS respectively. We maintain our HOLD rating with TP of Rs 448; indicating a further upside of 11.9%.