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Cholamandalam Investment and Finance
Strong growth prospects post consolidation; Buy
Cholamandalam Investment and Finance (CIF) has embarked on
significant branch addition after having consolidated its personal loan
portfolio over FY08-10. About 90% of its branches are in tier-2 & tier-3
cities, where rising rural disposable income acts as a hedge against
the tough macro-economic environment. This, coupled with the
introduction of high-yielding new products, is likely to result in robust
loan growth. We expect strong loan growth, better NIM and lower
provisioning to drive RoA to 1.6% by FY14 (from 0.7% in FY11). We
initiate coverage on CIF with a Buy rating and a price target of `181.
Focus on bottom of pyramid to drive robust loan growth. With ~90%
of branches in tier-2 and tier-3 cities, CIF’s focus is on the middle- and
lower-income segment in rural India. Post consolidation of its personal
loan portfolio over FY09-10, CIF has widened its branch network by 45%
to 342 branches in the last six months. It also plans to diversify its product
mix – commercial vehicle financing constitutes 67% of its credit portfolio –
by introducing gold loan and tractor finance. We expect branch expansion
and new products to drive 34% CAGR in loan book over FY11-14.
High-yield products to improve NIM. CIF plans to raise exposure to
high-yield secured retail products such as used-vehicle and gold-loan
financing. Together with the expected easing of interest rates, this is
likely to aid NIM improvement to 6.5% by FY14, from 6% in 1HFY12.
Improving asset quality. Provisions rose to over 3.7% of advances over
FY08-11 on significant write-offs in personal loans. With limited exposure
to personal loans and stable levels of gross NPAs in the vehicle & mortgage
businesses (0.6% & 1.3%, respectively), credit cost is estimated to improve
to 0.9% of loans, and drive 70.3% CAGR in earnings over FY11-14.
Valuation. At our target price, CIF is estimated to trade at a PBV of
1.8x FY12e and 1.5x FY13e. Risk: Slower-than-expected rural
economic growth could impact loan growth
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cholamandalam Investment and Finance
Strong growth prospects post consolidation; Buy
Cholamandalam Investment and Finance (CIF) has embarked on
significant branch addition after having consolidated its personal loan
portfolio over FY08-10. About 90% of its branches are in tier-2 & tier-3
cities, where rising rural disposable income acts as a hedge against
the tough macro-economic environment. This, coupled with the
introduction of high-yielding new products, is likely to result in robust
loan growth. We expect strong loan growth, better NIM and lower
provisioning to drive RoA to 1.6% by FY14 (from 0.7% in FY11). We
initiate coverage on CIF with a Buy rating and a price target of `181.
Focus on bottom of pyramid to drive robust loan growth. With ~90%
of branches in tier-2 and tier-3 cities, CIF’s focus is on the middle- and
lower-income segment in rural India. Post consolidation of its personal
loan portfolio over FY09-10, CIF has widened its branch network by 45%
to 342 branches in the last six months. It also plans to diversify its product
mix – commercial vehicle financing constitutes 67% of its credit portfolio –
by introducing gold loan and tractor finance. We expect branch expansion
and new products to drive 34% CAGR in loan book over FY11-14.
High-yield products to improve NIM. CIF plans to raise exposure to
high-yield secured retail products such as used-vehicle and gold-loan
financing. Together with the expected easing of interest rates, this is
likely to aid NIM improvement to 6.5% by FY14, from 6% in 1HFY12.
Improving asset quality. Provisions rose to over 3.7% of advances over
FY08-11 on significant write-offs in personal loans. With limited exposure
to personal loans and stable levels of gross NPAs in the vehicle & mortgage
businesses (0.6% & 1.3%, respectively), credit cost is estimated to improve
to 0.9% of loans, and drive 70.3% CAGR in earnings over FY11-14.
Valuation. At our target price, CIF is estimated to trade at a PBV of
1.8x FY12e and 1.5x FY13e. Risk: Slower-than-expected rural
economic growth could impact loan growth
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