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Cholamandalam Investment and Finance Q3FY14 results update

February 3, 2014, Monday, 06:35 GMT | 01:35 EST | 11:05 IST | 13:35 SGT
Contributed by Nirmal Bang


Cholamandalam Investment and Finance (CIFC) reported results broadly in line with expectations.
 
- AUM increased 28.5% YoY and 5.3% QoQ led by growth in vehicle finance and home equity business. Disbursement growth witnessed growth of 7.1% YoY reflecting overall slowdown in the vehicle financing segment. Home equity business continued to grow at a decent pace (31% YoY).
 
- Within the vehicle finance segment, CIFC continues to focus on tractors (11% of total disbursement) and used vehicles (16%) while the share of HCV (8% of total disbursement) and LCV (25%) is declining.
 
- Management has guided for continued traction in the home equity segment while expects vehicle financing segment to witness growth in single digit. It has also entered in new business like home loan, rural and MSME lending since last year. At current levels, new business contributes 2% of the book. Margins improved QoQ led by stable borrowing cost.
 
- Margins are expected to remain broadly stable going forward as well 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.
 
- Provisions continued to remain higher in this quarter as well as a prudent step towards vehicle financing portfolio.
 
- Though cost to income ratio remained higher as compared to Q2FY14, we believe that slowdown in expansion and improving productivity of existing branches will lead to an improvement in the cost to income ratio.
 
- Considering the weakness prevailing in the CV industry, we have lowered our growth outlook for the company. Lower opex coupled with improving productivity of branches will lead to an improvement in cost to income ratio. On the asset quality front, concerns continue to remain on the vehicle finance segment with more stress towards HCV segment. Tractor finance and car portfolio of the company are performing well.
 
Going forward, we believe that stable asset growth and improving productivity will lead to stable operating performance. However, increasing stress in the asset quality is likely to keep the performance of the stock under check. We expect PAT to grow at 18.4% for FY14E and witness CAGR of 15.1% over FY13-FY15E. We expect RoE to be at 16.7% in FY15E and RoA (PAT) to be at 1.7% in FY15E. At CMP the stock is trading at 1.63x FY14E and 1.43x FY15E ABV and 9.71x FY14E and 8.67x FY15E EPS respectively. Considering the stress in the overall macro-economic environment we expect the near term performance to remain subdued and maintain our HOLD rating with a target price of Rs 276 (1.6x FY15E ABV), indicating an upside of 12.2% from current levels.
 
- AUM increased 28.5% YoY and 5.3% QoQ led by growth in vehicle finance and home equity business. Disbursement growth witnessed growth of 7.1% YoY reflecting overall slowdown in the vehicle financing segment. Home equity business continued to grow at a decent pace (31% YoY).
 
- Within the vehicle finance segment, CIFC continues to focus on tractors (11% of total disbursement) and used vehicles (16%) while the share of HCV (8% of total disbursement) and LCV (25%) is declining.
 
- Management has guided for continued traction in the home equity segment while expects vehicle financing segment to witness growth in single digit. It has also entered in new business like home loan, rural and MSME lending since last year. At current levels, new business contributes 2% of the book. Margins improved QoQ led by stable borrowing cost.
 
- Margins are expected to remain broadly stable going forward as well 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.
 
- Provisions continued to remain higher in this quarter as well as a prudent step towards vehicle financing portfolio.
 
- Though cost to income ratio remained higher as compared to Q2FY14, we believe that slowdown in expansion and improving productivity of existing branches will lead to an improvement in the cost to income ratio.
 
- Considering the weakness prevailing in the CV industry, we have lowered our growth outlook for the company. Lower opex coupled with improving productivity of branches will lead to an improvement in cost to income ratio. On the asset quality front, concerns continue to remain on the vehicle finance segment with more stress towards HCV segment. Tractor finance and car portfolio of the company are performing well.
 
Going forward, we believe that stable asset growth and improving productivity will lead to stable operating performance. However, increasing stress in the asset quality is likely to keep the performance of the stock under check. We expect PAT to grow at 18.4% for FY14E and witness CAGR of 15.1% over FY13-FY15E. We expect RoE to be at 16.7% in FY15E and RoA (PAT) to be at 1.7% in FY15E. At CMP the stock is trading at 1.63x FY14E and 1.43x FY15E ABV and 9.71x FY14E and 8.67x FY15E EPS respectively. Considering the stress in the overall macro-economic environment we expect the near term performance to remain subdued and maintain our HOLD rating with a target price of Rs 276 (1.6x FY15E ABV), indicating an upside of 12.2% from current levels.