Recommendations » India

Cholamandalam Investment and Finance Q3FY13 results update

Contributed by Nirmal Bang

Cholamandalam Investment and Finance (CIFC) reported strong set of numbers in Q3FY13 with net profit almost doubling to Rs 81.4 cr from Rs 41.1 cr in Q3FY12. The company witnessed an increase in net interest income driven by strong AUM growth. The company witnessed a significant improvement in the cost to income ratio driven by the strong growth in operating income and the branches showing improved productivity.

We like the strategy of Management to maintain growth but not compromising on the asset quality front. The company is not targeting an aggressive growth in the gold loan portfolio as it is awaiting the final guidelines of RBI on that front. The overall industry growth for MHCV and HCV is bearing the brunt of slowdown currently and as such CIFC emerges as a safe player as it has been focusing more on the high yielding and growing Used CVs and LCVs segment which will ensure that growth continues going forward as well. With most of the branch network expansion in place, CIFC now intends to focus on improving the productivity of these branches which will lower the cost to income ratio. We believe that margins will continue to remain strong as CIFC has significant exposure to bank borrowings and with easing interest rate cycle (expected from Q4FY13); it stands to benefit due to re-pricing of liabilities where most of the loans are at fixed rate.

We believe that the above initiatives with a revamped business model will lead to a sustainable and profitable growth in CIFC’s business and expect PAT to grow at a CAGR of 51% over FY12-FY14E. We expect CIFC to report an improvement in its RoE from 14.0% in FY12 to 19.8% in FY14E (post dilution) and RoA (post tax and post dilution) to improve from 1.5% in FY12 to 2.0% in FY14E. At CMP the stock is trading at 2.32x FY13E and 1.81x FY14E ABV and 12.85x FY13E and 10.43x FY14E EPS respectively. We had recommended the stock in our report dated 29th November 2012 at Rs 238 with a target price of Rs 298. The stock has already appreciated 19.7% since then and achieved our target price. Based on our estimated BV of Rs.157 per share for FY14E and P/ABV target multiple of 2.1x we arrive at a target price of Rs.329. We continue to maintain our positive outlook on the stock and recommend investors to HOLD the stock for a further upside of 16% from current levels.

- NII grew 15.0% QoQ and 48% YoY to Rs 279 cr driven by strong growth in AUM and lower cost of funds.

- CIFC reported strong growth in AUM at 41.0% YoY and 9.5% QoQ to Rs 17,124 cr in Q3FY13.

- Disbursements growth remained robust at 36% YoY and 17% QoQ to Rs 3,114 cr during Q3FY13.

- CIFC witnessed improvement in the cost to income ratio driven by the strong growth in operating income and improved productivity.

- Gross NPA increased from 1.06% in Q2FY13 to 1.17% in Q3FY13. Net NPA stood at 0.63% vs 0.57% QoQ. The company witnessed some stress on the Loan against Shares and made provision for the same.

- The company has declared an interim dividend of Rs 2.5.