Cholamandalam Investment Limited - Tailwinds ahead; Result Update Q3FY15 :: Edelweiss, report

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Cholamandalam Investment and Finance Ltd. (CFL) has reported stable set of numbers for Q3FY15. The company’s AUM grew by 12% YoY, from INR 22,007 cr in Q3FY14 to INR 24,736 cr in Q3FY15. PAT increased to INR 111 cr in Q3FY15 from INR 92 cr in Q3FY14, representing a growth of 21% YoY. Disbursement growth remained muted with 8% de-growth YoY, mainly due to marginal de-growth of 11% in vehicle disbursements (70% of AUM). The asset quality remained steady, with Gross NPA increasing marginally from 2.6% in Q2FY15 to 2.8% in Q3FY15. NPAs are expected to peak out in the next few quarters. There is a discernible change in sentiment at the ground level but it will take few quarters to reflect the same in the company’s financials. We maintain our bullish stance on the stock from a long-term perspective.

Muted loan growth

CFL’s AUM increased by 12% YoY from INR 22,007 cr in Q3FY14 to INR 24,736 cr in Q3FY15. The loan book mix changed, with the vehicle financing book ratio as % of total AUM coming down from 75% in Q2FY14 to 70% in Q3FY15. At the same time, home equity book ratio as % of total AUM increased by 330bps. The ratio is expected move further in favor of home equity going forward. And, although the vehicle finance book has higher NIMs vis-à-vis home equity book, the latter has higher return on assets (RoA).

Return ratios to stabilize

During Q3FY15, CFL reported RoE of 14.6%. Due to a weak macroeconomic environment, growth in vehicle financing book remained low. There is a discernible change in sentiment at the ground level but it will take few quarters before growth comes back on a sustainable basis. At the company level, there has been constant focus on reducing costs. The operating cost-to-asset ratio has remained flat YoY at 3.4%. CFL targets to bring down the same below 2.5% over the next few years. Out of the total 579 branches, only 78 branches do home equity. With the increase in ratio of branches providing home equity loan, operating leverage will kick in going forward. The company targets to achieve RoE of 18-20% through change in product mix, reduction in funding cost and controlling operating costs.

Asset quality to stabilize in coming quarters

CFL has reported a dip in asset quality, with gross NPA increasing marginally from 2.6% in Q2FY15 to 2.8% in Q3FY15 and net NPA increasing from 1.4% in Q2FY15 to 1.5% in Q3FY15. The provision coverage ratio stood at 46% in Q3FY15 compared to 46% in Q2FY15. The NPAs are expected to peak out in the next few quarters.

Well capitalized

Currently, the capital adequacy ratio is at 20.9% and Tier-II ratio is at 8.22%. The company had issued 5 lakh Compulsorily Convertible Preference Shares of INR 100 each last quarter. This has led to capital infusion of INR 500 cr. The conversion price of CCPS is INR 407 per share. Post the fund raising, the company will be well capitalized for the next two years.

LINK
https://www.edelweiss.in/research/Cholamandalam-Investment-Limited--Tailwinds-ahead;-Result-Update-Q3FY15/10005502.html